The act of giving to charity is something has been at the forefront of many American’s minds lately. From dealing with the pandemic fallout to grappling with the social issues that have plagued the nation, thinking about those struggling often inspires giving. COVID-19 has had a major impact on the country, and of course the entire world. While it goes without saying that the physical and mental health of the nation has suffered greatly, the financial health of the nation has struggled immensely as well.
Year-end tax planning means different things for different individuals. This is a year that giving a charitable donation may be seen as an obligation. Plus, the tax break that comes with charity giving is enticing too. Many people falsely believe that making a charitable donation is a no brainer when it comes to tax purposes. However, the passage of the Tax Cuts and Jobs Act (TCJA) in 2017 makes it less of a no brainer. In fact, since that was passed, a charitable donation does not necessarily carry with it a financial advantage. Most notably is the fact that the majority of Americans do not itemize.
So, if you are considering a charitable donation this year, it makes more sense to do it out of the goodness of your heart rather than the tax implications that it may or may not carry. Regardless, if you plan to seek benefit from your donation this year, keep in mind the following pieces of information:
- CARES Act: after passing in April, the CARES Act made it clear that Americans would still be able to take advantage of a tax break for charitable donations, even if they do not itemize. Now, taxpayers who take a standard deduction will be entitled to deduct up to $200 on their tax return for charitable donations. This deduction will lower one’s overall tax liability, as it is an above the line donation.
- Bunching: this is the act of frontloading several years’ worth of donations into one year. As a result, the taxpayer can itemize and then benefit from the tax deduction. Bunching often works best via a donor advised fund (DAF).
- Not all charitable donations are deductible.
No matter how you plan to give back this year, it is important to think through the repercussions of that act. Since charitable donations are often much less of a tax benefit than many think, it is best to look at charity as a meaningful, fulfilling act. If you do in fact receive a tax deduction based on the charitable donation then that is just an added bonus.
At Ellrich, Neal, Smith & Stohlman, P.A., our tax planning service goes far beyond filing a tax return. We assist new businesses with basic ownership options and tax consequences and guide growing businesses through year-end planning and projections. We offer a broad range of consulting services that include evaluating material transactions, mergers and acquisitions, international taxation strategies, and estate and trust planning.