Special 2021 Deduction For Non-Itemizers Giving To Charity

Giving Tuesday is coming up at the end of November, so here’s a special reminder about this year’s “bonus” charitable deduction. As part of the CARES Act in 2020, Congress authorized a special charitable deduction for 2020 only for people who aren’t able to itemize due to the standard deduction being higher than their itemized deductions. The limit was $300, and that was the case whether Single, Head-Of-Household, or Married Filing Jointly. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, passed late last year extended this deduction into 2021 and doubles it to $600 for joint filers.

As with last year, to qualify, the donation must be in cash, it must be to a qualifying organization (which is the same as for charitable donations as itemized deductions), it must be made by 12/31 (2021 this year), and appropriate records must be kept. As with itemized deductions, you can check whether the organization qualifies using the IRS’s Tax Exempt Organization Search. A $300 or $600 deduction may not sound like a lot, but many people have already made, or are about to make, some cash contributions for friends, colleagues, or family members that are raising money for various organizations. If you’re going to make the contribution regardless of the tax benefit, you might as well take the tax benefits that are available. In most cases, substantiation simply requires an acknowledgement from the organization (including stating that you received no benefits for your donation) and a cancelled check or credit card statement. (For detailed record keeping requirements and special cases, see Charitable Contributions – Deductions & Recordkeeping in the blog archives.) So save those “thanks for your contribution” acknowledgement emails and keep a running list of your cash donations this year, whether you itemize or not. They will come in handy to the tune of up to $300 or $600 in deductions at tax prep time.

Dec 2020 COVID Relief

This one hasn’t gotten a fancy name yet (that I know of) like the CARES Act since it is attached to the 2021 Consolidated Appropriations Act (the “2021 spending bill” that funds the government), so I’m just referring to it as the Dec 2020 COVID Relief Bill. It was signed into law on 12/27/2020 and consists of ~$900B of funding, not to be confused with the $1.4T in general “keep the lights on” type funding in the rest of the Act. The full Consolidated Appropriations Act is 5,593 pages. I cannot claim to have read the whole thing. However, I’ve skimmed through it and read enough summaries now to feel comfortable calling out the top line virus-related items and the key tax and personal financial planning items for you. This list below includes the COVID Relief Bill portions, the relevant tax and financial planning-related items from the rest of the Act, and a few other callouts. Here goes:

  • Direct Payments (“stimulus checks”) – ~$170B for direct payments to taxpayers. $600 per individual earning $75k or less, or $1200 per couple earning $150k or less, +$600 per dependent child under age 17 (e.g. $2400 for a family of 4 earning $150k or less). Above the $75k/150k threshold, the payment amount drops by $5 for every $100 of income until it is completely phased out. Income used is the lower of 2019 or 2020. Payments will be sent out by direct deposit or check based on 2019 income, but can be trued up on the 2020 tax return if income was lower or more children were born. For more details, see this fantastic article from Forbes, and this nifty chart from the Tax Foundation
  • Unemployment Benefits – $120B. extends emergency Federally funded benefits (including that for self-employed) for 11 weeks and provides a $300/week Federal amount in addition to existing state-provided benefits.
  • Paycheck Protection Program (“PPP”) – $284B extends PPP v 1.0 and issues a new round of funding for PPP v2.0 Additionally, reverses the IRS interpretation that business expenses used to qualify for PPP forgiveness were not deductible. They clarified that those expenses are deductible. It also broadens the list of qualifying expenses for forgiveness to include operating expenses, supplier costs, property damage costs, and PPE expenses, still subject to the limitation that non-payroll expenses cannot exceed 40% of the forgiven loan amount. Not exactly auto-forgiveness for small loans (many were calling for this), but the Act does tell SBA to create a one-page form to apply for auto-forgiveness (*smacks my head*) for loans < $150k. Side note: Auto-forgiveness = Ease of use as the main course, but with a large side of increased fraud. I think this auto-forgiveness means that an applicant would get forgiveness even if payroll was reduced during the covered period, so long as the PPP money wasn’t used improperly and no fraud was involved. PPP v 2.0 is for businesses w/ < 300 employees (<500 if accommodation or food service) and that had at least one quarter of 2020 with revenue at least 25% lower than the same quarter in 2019. Max loan is $2M or 2.5x avg monthly payroll whichever is less, (3.5x for accommodation or food service).
  • Vaccines, Testing, Health – $63 billion for vaccine distribution, testing and tracing, and other health-care initiatives, most of which will be administered by the states.
  • Transportation – $45 billion for transit agencies, airlines ($15B specifically allocated for airline payroll support), airports, state departments of transportation, and rail service.
  • Education & Childcare & Broadband Support – $82B in funding for colleges and schools, including support for HVAC upgrades to mitigate virus transmission + $10 billion for child care assistance + $7B for enhanced broadband access.
  • Nutrition & Agriculture – $26B for food stamps, food banks, school/daycare feeding programs, and payments, purchases, and loans to farmers and ranchers impacted by covid-related losses.
  • Rental Assistance – the eviction moratorium is extended through 1/31/2021 (for now). $25B is authorized to help troubled renters and landlords by paying future rent and utilities as well as back rent owed or existing utility bills.
  • SBA Loan Relief – The CARES Act authorized SBA to pay up to six months of principal and interest on existing Section 7 SBA Loans for impacted borrowers. This Act extends that by another three months.
  • Economic Injury Disaster Loans (EIDL) – $20B in additional funding for businesses in low-income communities + $15B of dedicated funding is set aside for live venues, independent movie theatres, and cultural institutions.
  • Credit for Paid Sick + Family Leave – this was created by the Families First Act and is now extended through 3/31/2021 (was 12/31/2020).
  • Employee Retention Tax Credit – created under the CARES Act, is extended through 6/30/2021 and improved. It’s now up to 70% of wages capped at $10k of wages per employee per quarter, instead of 50% capped at $10k in total. Business qualifies if revenue for the quarter was down at least 20% from the same quarter in 2019. Important: it appears this credit is now allowed along with a PPP Loan (under the CARES Act, it was one or the other), though you still can’t double count the same wages for the credit and PPP forgiveness.
  • Payroll Tax Deferral – the president signed an executive order in September allowing employers to opt in to a payroll tax deferral for employees. Almost no one did (except the government) because it was too risky on the employer and deferral for a few months was pretty meaningless. Those that did were supposed to repay the deferral by 4/30/2021. That has now been extended to 12/31/2021, giving more time to spread out the payback.
  • Lookback for Earned Income Tax Credit and Refundable Child Care Credit – taxpayers can, but don’t have to, use 2019 income instead of 2020 income to qualify for these in 2020.
  • Residential Solar Tax Credit – this was reduced to 26% of the cost of the project in 2020, scheduled to drop to 22% in 2021, and then eliminated after 2021. The Act extends the 26% credit for 2021 and 2022, dropping to 22% for 2023. It is now eliminated in 2024, unless additional legislation is passed.
  • Employer Paid Student Loans – Employers can continue to give up to $5250 per year tax-free to employees for student loan principal and interest repayment (either direct to the loan or to the employee to pay the loan). This is extended through 2025 (was set to expire at the end of 2020).
  • Tuition Deduction / Lifetime Learning Credit – The tuition deduction, unless extended in other legislation, is gone. Instead, there is now a higher income threshold for the Lifetime Learning Credit, now sync’d up with the American Opportunity Credit phaseout ($80-90k single / $160-180k married).
  • Student Loan Payment Forbearance – this WAS NOT extended in the Act. Student loan payments resume 1/1/2021.
  • Retirement Plan Distributions / Loans – The CARES Act allowed up to $100k of distributions from retirement plans for covid-impacted individuals, waiving the 10% penalty, and allowing the amounts to be repaid over 3 years such that no net tax would be owed. It also raised the 401k loan amount to the minimum of $100k or 100% of the balance (from $50k or 50%). These were effective through 12/30/2020. This treatment is now extended to non-covid-related Federally declared disaster areas between 1/1/2020 and 2/25/2021 where the individual has their principal place of residence and is economically impacted by the disaster.
  • Retirement Plan Required Minimum Distributions – these were waived by the CARES Act for 2020. This WAS NOT extended by the new Act. RMDs will be required for 2021 unless additional legislation is passed.
  • Medical Expenses Deduction – the deduction for medical expenses has been bouncing back and forth between a 7.5% AGI floor and a 10% AGI floor for years. It’s 7.5% for 2020 and was supposed to revert back to 10% for 2021. The Act sets this to 7.5% PERMANENTLY. One thing I can stop writing about every year!
  • Mortgage insurance premiums – remain deductible for another year through 2021.
  • The taxability of forgiven housing debt (foreclosure/short-sale) – is extended to 2025, but the amount is reduced to $375k single / $750k married.
  • Charitable Giving – The $300 charitable contribution deduction for those who don’t itemize is sticking around for 2021 now and joint filers will get $600 instead of $300 for 2021. Remember this is for cash donations only and donations to a Donor Advised Fund don’t count. And, the cap on the portion of your income you can give via a cash donation (other than to a Donor Advised Fund) and deduct stays at 100% for 2021.
  • Healthcare & Dependent Care Flexible Spending Account (FSA) flexibility – The Act allows plans to allow 2020 unused amounts can carryover to 2021 and 2021 can carryover to 2022. Additionally, the Act allows 2021 elections to be modified even though benefits enrollment is now closed for most employees. However, this only updates what the law will allow employer plans to do. The plans themselves would have to adopt the change in order for employees to be able to use the increased flexibility. Check with your benefits rep to see if your plan is adopting / has adopted the change.
  • Educator’s Deduction – this is the $250 per year that teachers get to deduct for money spent on school supplies for their classrooms (as if that’s all teacher’s spend on their classrooms). PPE and cleaning supplies now qualify for that $250.
  • Business Meals – for business owners, restaurant meals are 100% deductible for 2021 and 2022 (formerly only 50% deductible) as long as they meet the requirements of the previous 50% deduction (i.e. non-lavish, taxpayer is present, etc.). Note that this still does not include employee expenses, only schedule C filers. Applies to dine-in or take-out.
  • Surprise Billing Fix – an attempt to reduce the amount of “surprise billing”, which typically occurs when a patient goes to an in-network facility and uses an in-network doctor, but is provided services by an out-of-network provider along the way (e.g. anesthesiology, transportation, etc.). There are lots of carve outs and exceptions, so I’m skeptical of how much this really fixes, but it’s a start at least, going into effect in 2022. I’m sure much more will be written on the implications here soon.
  • Financial Aid Changes – Student Loan Application (FAFSA) simplification – lots of changes here, but they don’t go into effect until 2023. In the interest of time, I’ll table this one for now. Just know there are changes coming. Additionally, the number of Pell Grants will be increased.

In order to reach a bipartisan agreement, both of the following WERE NOT INCLUDED in the Act:

  • Business liability protection (i.e. can’t sue if you get covid at a business as long as they were following CDC guidelines), which Republicans wanted
  • State and Local Aid above and beyond that specifically budgeted for the items in the Act, which Democrats wanted.

I suspect there will be more to come, though the type of relief/stimulus likely depends on the outcome of the GA Senate run-offs. There is already a proposal to increase the $600 direct payments to $2000, supported by the House and the President, but that will have a difficult time in the Senate. We’ll have to wait and see what happens.

Special 2020 Deduction For Non-Itemizers Giving To Charity

It’s Giving Tuesday, so here’s a special reminder about this year’s “bonus” charitable deduction. As part of the CARES Act, Congress authorized a special charitable deduction for 2020 for people who aren’t able to itemize due to the standard deduction being higher than their itemized deductions. The limit is $300, and that’s the case whether your Single, Head-Of-Household, or Married Filing Jointly. To qualify, the donation must be in cash, it must be to a qualifying organization (which is the same as for charitable donations as itemized deductions), it must be made in 2020, and appropriate records must be kept. As with itemized deductions, you can check whether the organization qualifies using the IRS’s Tax Exempt Organization Search. A $300 deduction may not sound like a lot, but many people have already made, or are about to make, some cash contributions for friends, colleagues, or family members that are raising money for various organizations. If you’re going to make the contribution regardless of the tax benefit, you might as well take the tax benefits that are available. In most cases, substantiation simply requires an acknowledgement from the organization (including stating that you received no benefits for your donation) and a cancelled check or credit card statement. (For detailed record keeping requirements and special cases, see Charitable Contributions – Deductions & Recordkeeping in the blog archives.) So save those “thanks for your contribution” acknowledgement emails and keep a running list of your cash donations this year, whether you itemize or not. They will come in handy to the tune of up to $300 in deductions at tax prep time.

Donor Advised Funds: Maximizing The Tax Benefit of Charitable Contributions

Do you make charitable contributions but find that you can’t deduct them for tax purposes because the standard deduction exceeds your itemized deductions?  If so, you can use something called a Donor Advised Fund (DAF) to group multiple years’ of future charitable deductions into one year for tax purposes and realize an immediate tax benefit.  This isn’t just shifting tax from one period to another as is the case for many tax strategies.  This will result in reduced taxes… more of your money kept in your pocket, or alternatively, more money you can give to those charities.

The Tax Cuts & Jobs Act (TCJA) imposed a limit of $10k per year that can be deducted as an itemized deduction for State & Local Taxes (SALT) paid each year.  Note that is true for both single and joint filers (i.e. the cap is not doubled to $20k for joint filers).  Additionally, TCJA doubled the standard deduction from $6k single & $12k joint to $12k single and $24k joint (inflation adjusted each year).  Finally, with depressed interest rates, many have been able to refinance their mortgage in recent years, leading to less of a mortgage interest deduction.  The combination of these factors has led to more and more filers taking the standard deduction rather than being able to itemize, meaning no additional tax benefit for charitable contributions.  With another wave of refinancing in 2020, even more taxpayers will find themselves in this situation. 

Let’s use some real numbers to demonstrate.  For 2020, the standard deduction is $12,400 for single and $24,800 for joint filers.  Let’s say that you’re married and your state income taxes and property taxes paid exceed the $10k limit, so you’d get $10k for SALT deductions in total due to the cap.  Let’s also say you have a $350k mortgage at 3% fixed, resulting in ~$10.5k of mortgage interest for 2020.  Finally, let’s say you give $4k per year to charity.  Since the SALT (10k) + mortgage interest (10.5k) + charitable contributions (4k) only total $24,500 of itemized deductions vs. the $24,800 standard deduction, it means that whether you made the charitable contributions or not, you’d still take the standard deduction.  You therefore get no tax benefit from the charitable contributions.  In fact, even if your total itemized deductions exceed $24,800, if the SALT + mortgage interest alone don’t exceed it, then some portion of your charitable contribution will provide no tax benefit.

If only there were a way to group several years’ worth of charitable contributions into a single year so you’d exceed the standard deduction (by a lot!), get a large tax benefit in that one year, and then take the standard deduction in the future years.  Enter the Donor Advised Fund.  A DAF is just an account with a DAF provider to which you make a lump sum contribution in a given year.  Since the contribution is irrevocable, and the DAF is a non-profit itself, you get to take the full amount of the contribution as a deduction in the year in which it’s made.  The money then remains in that account (it can even be invested) and you can make grants out of the account at any time to the charities of your choice.  Almost all charities, non-profits, and religious organizations are supported, though check with the DAF to make sure the organizations you want to support are allowed before making your contribution.

Back to the numerical example…  Instead of donating $4k each year for 5 years, you contribute $20k to a DAF in 2020 and then use the DAF to make $4k per year grants to the organizations you wish to support from 2020 – 2024.  In this case, your total deductions in 2020 amount to $40,500 (10k SALT + 10.5k mortgage + 20k charity) allowing you to itemize.  You’d then still take the standard deduction for the next four years.  The benefit is over $5500 of tax saved!

Even better, if you have highly appreciated assets, you can donate those and take a deduction for the fair market value of the asset, without ever having to pay capital gains tax on the asset’s appreciation.

Now, you may say that you don’t give to charity for the tax benefit, so who cares.  And it’s true.  No one gives to charity for the tax benefit because at most, you’d save $50 cents of tax for every $1 you donated which is clearly not a winning strategy.  But if each $1 you donate only costs you $0.50 cents with a tax benefit, then you could afford to donate twice as much with the tax benefit than without.  Therefore, whether you’re doing it to reduce your tax bill and keep more money in your pocket, or you’re doing it so you have more to donate to the charities (think of it as a government match facilitated by the tax code), there is a clear benefit to donate in a way that will allow you to take a tax deduction.

The typical DAF does charge an asset-based fee, but it is fairly low, in the 0.6-1.0% per year range.  The tax benefits of the DAF almost always outweigh any costs involved.  DAF providers typically cut off new account openings in early to mid-December in order to make sure they can get everything done by the end of year tax deadline, so if you’re interested in opening and funding a DAF, it is best to do so well in advance of end of year. 

In summary, DAF’s have low costs, allow you to reap substantial tax benefits, and still allow you to support the organizations that you typically support.  If your SALT deduction + mortgage interest deduction are below the standard deduction, and you make charitable contributions, you would almost certainly benefit from a DAF. 

IRS Squashes Most State SALT CAP Workarounds

When the Tax Cuts and Jobs Act (“TCJA”) was passed in late 2017, the standard deduction was increased and certain itemized deductions were eliminated or capped as an offset. One of the most noteworthy is the State And Local Tax (“SALT”) deduction, which allows taxpayers to deduct for Federal tax, what they pay in state/city income tax and property taxes on their residences. For many mid-upper income taxpayers in high-tax states, these deductions were already limited by the Alternative Minimum Tax (“AMT”) under prior law. Under the TCJA, SALT deductions are now limited to $10k per year for both single and married taxpayers. To give a real world example, if you make $150k and live in a state with a 6% effective tax rate, you’re $9k of state income taxes are still deductible, but only $1k of property taxes would be deductible on top of that.

Some states have taken action to try to circumvent the SALT limits by enacting laws that allow the creation of charitable funds to which taxpayers can donate money and receive a state income or property tax credit offsetting the amount “donated”. CT, NY, and NJ have passed laws that do this, while CA, IL, and RI had pending legislation as of June. Others are definitely looking into it. In late May, the IRS released a statement that they would be proposing regulations that would emphasize “substance over form” in these types of arrangements, essentially reminding everyone that a charitable contribution for which you get a tax credit is just really a tax paid and not a charitable contribution. Yesterday, the IRS released new regulations as promised. They also released a summary statement (below), which captures the essence of the regulations. That is, if you make a contribution to one of these charitable funds and receive a tax credit in return, the amount of the credit has to be subtracted from the contribution to determine your deductible amount. In other words, the work around created by these states won’t help.

The regulations go into effect on 8/27/2018, though the IRS points out that they’re not really a change of prior law (one was always required to subtract the benefit received from a charitable contribution to arrive at the deduction), but just a clarification. Technically though, you could make the argument that the law was previously unclear and that if one made a contribution pre-8/27 to one of these funds, it should be treated as a charitable contribution. The odds of audit increase in doing so, and there’s a decent chance that the IRS would nix the contribution, but for those who want to take a shot, that shot is probably available. Of course before doing so, you should of course check with a CPA, EA, or tax attorney to get a qualified tax opinion on the matter. The point is moot in most locations, because most states haven’t enacted laws that allow these types of funds to be set up. Even NJ and CT, who have enacted laws, have not, to my knowledge, set up the funds administratively. Why some municipalities in NY may have set them up (Scarsdale being one), most don’t seem to be available there either. If you have the option of making a contribution to one of these charitable funds in your state (meaning they passed legislation allowing the funds and the state or municipality actually set one up to receive money already), AND you’re comfortable making the claim that the limits imposed by the IRS regulations are new rather than clarifying existing law, then it would benefit you to make the contribution before 8/27. For all others, I don’t believe there’s any action to take on this.

You should also be aware that NY, NJ, MD, and CT have sued the Federal government over the SALT deduction caps as being unconstitutional. A few states have also threated that they will fight any IRS regulations that attempt to limit workarounds (e.g. the regulations that were released yesterday). I’m definitely not a legal expert, but it feels like this one is going to drag on for a very long time until we have a firm answer. With that said, the law of the land as of 8/27 (and probably before) is that if you make a charitable contribution and receive a tax credit in return, your Federal deduction is limited to the difference (in most cases, see below for details).

Lastly, existing programs that allow contributions to education or medical charitable funds in exchange for tax credits (e.g. GA’s GOAL program) are also impacted by this. The IRS has stated that it previously let those go because if the charitable contribution wasn’t made, then the state income tax paid would be higher and that was previously deductible for most tax payers (except those in AMT) anyway. You can still contribute to those funds and get a state tax credit for doing so, but the Federal charitable deduction is no longer available, at least starting 8/27.

From the IRS:

Treasury, IRS issue proposed regulations on charitable contributions and state and local tax credits

WASHINGTON — Today the U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations providing rules on the availability of charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state or local tax credit.

The proposed regulations issued today are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. The proposed regulations are available in the Federal Register.

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.

The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.

Treasury and IRS welcome public comments on these proposed regulations. For details on submitting comments, see the proposed regulations.

Updates on the implementation of the TCJA can be found on the Tax Reform page of IRS.gov.