New Covid Reduction Invoice will increase tax breaks for charitable donations in 2021

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Charitable donations pay off a little more – that is, when the latest Covid law goes into effect.

The $ 908 billion Pandemic Relief Bill includes $ 600 stimulus checks, $ 300 unemployment benefits, and a second round of forgivable small business loans.

It also includes a number of changes to tax law, including widening incentives to encourage taxpayers to donate to charity.

Don’t revise your tax plans just yet. President Donald Trump did not sign the legislation. In fact, he ordered lawmakers to revise the bill to include $ 2,000 in stimulus payments to households.

In the meantime, here’s what you should know about the charity provisions in the action – should it become law.

$ 600 for married couples in 2021

The CARES bill, passed this spring, included an above-the-line deduction that allowed a write-off of up to $ 300 in charitable donations that year.

You can also qualify for the break if you donate with your credit card or write a check to the charity.

It is available to filers receiving the 2020 standard deduction of $ 12,400 for singles or $ 24,800 for married couples.

In the new proposal, lawmakers call for the amortization for joint applicants to be increased to $ 600 from next year. It will still be $ 300 for individual taxpayers.

Remember, deductions will lower your taxable income based on your income tax bracket. That said, the higher your brace, the greater your tax savings.

2020 income tax brackets

IRS

Essentially, a $ 300 deduction is worth $ 30 for a taxpayer in the 10% tax bracket, but $ 111 for someone in the 37% tax bracket.

“If you’re in the 12% or 22% bracket, what’s the benefit?” said Brad Sprong, national tax officer for KPMG Private Enterprise. “The optics are powerful against the dollar amount.”

Even with the low threshold, taxpayers should remember to keep any receipts or confirmations justifying the contribution.

Donors must retain this documentation for any donation greater than $ 250.

Lawmakers also called for action against taxpayers who misrepresent the amount they give to charity.

Filers who inflate the deduction and stop paying their taxes will have to pay a penalty of 50% of the underpaid tax according to the invoice. This is a 20% penalty.

Itemizer: Larger deductions for cash donations in 2020, 2021

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For 2020, the CARES Act also allowed a more generous write-off for donors who report deductions on their tax returns.

This year, these households can deduct up to 100% of their adjusted gross income from donations to qualified charities. Private foundations and funds advised by donors are excluded.

Typically, you can write off up to 60% of your AGI for donating money.

The legislature wants to extend the higher deduction for cash until 2021, as can be seen from the text of the relief bill.

The target audience for large donations here could be retirees with significant wealth, rather than people who are still working and saving for retirement.

“It would clearly be someone with a lot of wealth but not a lot of income,” said Sprong of KPMG. “You could have municipal bonds and social security that are low in taxation.”

As attractive as the larger deduction may seem, cash is probably the least tax efficient way to donate.

A smarter tax planning game would be to donate valued assets, including stocks or mutual funds, directly to a nonprofit.

That way you avoid the tax damage you would otherwise suffer in liquidation and you get a write-off for the fair market value of the investment.

“Stock donations are always a great tip because you don’t have to realize those huge gains,” said Lisa Greene-Lewis, CPA and TurboTax expert. “People have seen some big wins this year.”

Make sure you have held the asset for at least a year to deduct its fair value. Otherwise, you can only deduct your cost base or your original investment in the asset.

“This comes as a surprise sometimes,” said John Voltaggio, senior vice president, wealth management, Northern Trust. “You can donate the stock to charity, but you must have it for at least 12 months to receive this benevolent treatment.”