The COVID-19 pandemic has placed a financial strain on people across the United States. In December, Congress passed The Taxpayer Certainty and Disaster Tax Relief Act to help stimulate the economy and ease the tax burden on individuals and families.
One significant change to the tax code includes the expansion of deductions for charitable giving.
As you are working on your 2021 taxes, due in April 2022, it’s important to keep these changes in mind.
Whether you itemize your deductions or take the standard deduction, these changes can benefit you.
Here are the major changes taxpayers will notice in 2021 and the ones you should speak to your Marin tax professional about.
Changes for Non-Itemizers
Individuals who do not itemize their deductions will be allowed a $300 deduction for charitable cash contributions. Married couples who file jointly will have a deduction of up to $600. This is in addition to the standard deduction.
For some people, depending on their income, this increased deduction may not be as beneficial as the 2020 deduction. For 2020 returns, which are due this April, cash contributions will be deducted up to $300 while computing adjusted gross income (AGI).
However, for 2021, the deduction will be taken after AGI is computed. Many other credits and deductions are determined based on AGI, so this distinction could be crucial for many taxpayers.
Changes for Itemizers
In March 2020, the CARES Act suspended the 60% deduction limit on cash contributions to charities. This allows larger cash contributions to be deducted from one’s taxes – up to 100% of the AGI. This suspension has been extended to 2021.
“Cash contributions” are not limited to donations made with paper money – they include checks, electronic funds transfers, and payments made with credit cards.
To deduct a charitable donation, it must be documented in one of three ways:
- Bank, credit card, or credit union statements – or a canceled check.
- A receipt or letter from the charity
- Payroll deduction records, such as a pay stub or pledge card
These documents must include the charity’s name, the date of donation, and the amount contributed.
To claim a donation of $250 or more, you must have written acknowledgment of your donation from the charitable organization. This letter should include:
- The amount of your donation
- Whether the organization gave you any material goods or services in exchange for your contribution
- That the only thing you received from the charity was an “intangible religious belief,” if they are a religious institution
For example, you would not be able to write-off donations made to a bell-ringer during the holiday season, as those individuals do not give receipts for donations.
However, if you donate to the same organization through their website, you are likely to receive a receipt and could potentially write-off the donation on your taxes.
Extending the Season of Giving
These tax code changes are intended to spur people to continue making charitable donations, despite the effects of the COVID-19 pandemic on our economy. If you are moved to donate to a cause over the next year, know that Uncle Sam has your back.
If you’re wondering how these changes to the tax code will affect your 2021 taxes, contact the San Rafael tax professionals at Books in Balance right now.