by James G. Graham, Principal, RSM US LLP
As the end of the year approaches, December has historically been a time for charitable giving and locking in charitable tax deductions prior to year-end. While we continue to be in the midst of a pandemic, we expect 2020 will be no different as donors open up their pocketbooks to help charities serve those in need. Congress added new tax incentives for charitable donations as part the CARES Act stimulus legislation enacted earlier in the year. The CARES Act included a $300 above-the-line deduction for non-itemizers as well as a 100 percent of Adjusted Gross Income (AGI) threshold for itemizers for any cash contributions made during 2020.
What do these new incentives mean for year-end tax planning and charitable giving? For single individuals, especially those who own a home, they will likely be itemizing deductions since the combination of up to $10,000 of state and local income/property tax deductions plus a mortgage interest deduction will exceed the $12,400 standard deduction. If that is the case, any charitable giving will directly lower their tax bill for 2020. For single taxpayers who will not itemize in 2020, cash charitable donations up to $300 will be tax deductible above-the-line for 2020.
For married couples, the ability to itemize is not as easy since they are subject to the same $10,000 dollar limitation for state and local income/property tax deductions and will need at least $14,800 of other write-offs to exceed the standard deduction on a married filing joint return. In many situations, the combination of the $10,000 state and local income/property tax and mortgage interest deductions will not be enough to exceed the $24,800 standard deduction threshold without charitable donations. For those who are age 65 or older, $1,300 per person is added standard deduction threshold. As noted above, married couples who are unable to itemize will also benefit from making up to $300 of cash donations in 2020 and claim the above-the-line tax deduction.
Does that mean taxpayers should limit their charitable donations to $300 for the year and just claim the standard deduction plus $300? Not necessarily. While the tax incentive for making charitable donations may be important, it is normally not the primary reason for supporting charities. Rather, charitable giving is more about the desire to help others in need and the tax benefit is simply a “bonus” to the donor. Wisconsin also allows a 5 percent tax credit for charitable donations regardless of whether the taxpayer itemizes for federal tax purposes.
For taxpayers who will itemize during 2020 and desire to donate a significant amount to charities, the CARES Act added another incentive by effectively eliminating one of the AGI limitations that normally applies to the amount of cash donations that are tax deductible for the year. For the 2018 and 2019 tax years, the tax deduction for cash donations was limited to 60 percent of AGI and any excess would carry over for up to 5 tax years subject to similar deduction limitations. Before 2018, the AGI threshold limitation for cash donations was 50 percent of AGI. For 2020, the CARES Act increased the AGI threshold limitation to 100 percent of AGI. The AGI threshold will go back to 60 percent for 2021.
For 2020, there are tax incentives for every taxpayer that encourage donations to charities whether they itemize or not. The $300 above-the-line tax deduction for non-itemizers is only applicable for the 2020 tax year, so hopefully taxpayers will take advantage of this tax incentive by the end of the year.