New Bigger Charitable Tax Break For 2021 In Year-End Spending Package

There’s good tax news for charities and donors in the year-end spending package Congress passed yesterday. It includes two tax changes that can boost donors tax deductions for charitable giving, meaning they can give more to charity at a lower net cost. But watch out: The legislation also increases penalties for overstating the value of charitable gifts.

The first change is an above-the-line tax deduction for gifts of cash to charity of up to $300 for individuals and up to $600 for joint filers for 2021. It’s basically an extension and enhancement of the new one-year tax break Congress put in for 2020 under the pandemic relief CARES Act: a tax deduction for cash gifts to charity up to $300. The difference is that for 2020, the deduction is limited to $300 per tax return. The new provision allows a married couple filing jointly to basically get double the deduction for 2021 if they make $600 in cash gifts to charity. Gifts to donor-advised funds and private foundations do not count.

Why is the new above-the-line deduction important? Under the 2017 tax law, the standard deduction was increased so much that way fewer people are itemizing deductions, including for gifts to charity. The above-the-line deduction lets non-itemizers take a charitable deduction too. For a married couple filing jointly who take the standard deduction in tax year 2021, if they give $600 to charity, they’d get the $600 tax break in addition to the standard deduction ($12,550 for individuals and $25,100 for joint filers). If they’re in the 10% tax bracket, it would save them $60 in taxes. If they’re in the 37% tax bracket, it would be worth $222. Note: the fact that it’s an above-the-line deduction can also help because it reduces your adjusted gross income, which can then mean you qualify for other tax breaks.)

Charities lobbied for an uncapped above-the-line deduction back in 2017, calling it by the catchier name, the “universal” deduction. Universal, because it would extend the charitable deduction to all taxpayers. Extending the above-the-line deduction through 2021, and doubling the cap for joint filers, are steps in that direction. An uncapped above-the-line deduction isn’t likely. The Joint Committee on Taxation estimates the provision extending the deduction through 2021 will cost the Treasury $2.9 billion.

The spending package includes another charity provision that would help the most generous individual donors and corporate givers by eliminating the percent of AGI limits for charitable deductions. It’s the same provision that was put in for 2020 under the CARES Act, just extended through 2021. For individuals, the 50-percent of adjusted gross income limitation would be suspended for 2020. For corporations, the 10% limitation would be increased to 25% of taxable income. 

The toughened penalty provision works like this: If the IRS determines that you’ve overstated charitable tax deductions (and underpaid your tax liability), you may be assessed a penalty of 50% of your total deduction amount, up from 20% under prior law.

Further reading:

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