There’s no dispute that 2020 has been an incredibly difficult year, whether for health reasons, the mental and emotional toll of limited social interaction, or the financial fallout of the coronavirus.
However, there is a silver lining—as millions of Americans reach out to help one another through charitable giving, it’s clear that what holds us together is stronger than whatever 2020 may bring. And, due to the CARES Act relief for COVID-19, that generosity can ease your taxes owed when you file in early 2021.
You can get a charitable donation deduction and take the standard deduction
Most Americans take the standard deduction. This is especially true ever since the Tax Cuts and Jobs Act of 2017 doubled the standard deduction amount, making the extra paperwork and math unnecessary for the large majority of taxpayers that come up short on itemized deductions. The downside is that, up until 2020, the charitable donation deduction has only been available when you itemize deductions on Schedule A.
For the 2020 filing year, however, the CARES Act provides an above-the-line deduction available for any donations to a qualified charitable organization—which means your donations can reduce your taxable income even when you take the standard deduction. Donations don’t have to be directly related to COVID-19, and it’s worth up to $300 for single filers (up to $600 for married filers). This is great news for tens of millions of filers!
You can deduct itemized charitable donations up to 100% of your Adjusted Gross Income (AGI)
For those who do have enough individual deductions to itemize—such as mortgage interest, donations, property taxes, real estate taxes, state and local income taxes—there is good news, too. Typically, you could only deduct donations up to 60% of your adjusted gross income (AGI). Once again, the CARES Act provides extra benefits for charitable donations: In 2020, donations can be up to 100% of your AGI, so you could potentially reduce your taxes owed an additional 40%.
Required minimum distributions (RMDs) are waived for 2020, but you can still make a qualified charitable distribution (QCD)
Individuals older than 70 years and six months would usually be required to take out some portion of their retirement savings from an IRA each year; these savings account withdrawals are called required minimum distributions (RMDs).
To provide a bit of extra security to those who may need it, the CARES Act repealed RMDs for 2020. However, you can still make charitable donations, up to $100,000 per spouse, straight from your IRA—these are called qualified charitable distributions (QCDs).
A QCD provides some significant tax savings for retirees—you don’t pay any taxes on it because it’s not considered income. This can also help keep your adjusted gross income lower which could lead to additional tax breaks.
Of course, a QCD can’t also be claimed as a deduction on your Schedule A if you itemize (that’s considered double dipping, which is a big no-no). If you claim the standard deduction, which is much more common after the Tax Cuts and Jobs Act of 2017 doubled the deduction amount, you can also make a QCD. Keep in mind that if you do take an RMD, the QCD amount is applied towards your RMD.
So 2020 May Be The Best Year To Give To Charity!
Download your copy of this article as a handy guide to reference while you file your 2020 taxes.
Visit the tax experts at 1040.com to learn how your generosity can ease your taxes owed when you file in early 2021.
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