Are you seeking out maximum tax deductions for 2020? The charitable contribution limit for 2020 has changed: We spoke with one of our experienced finance professionals for insight on this year’s Coronavirus Aid, Relief, and Economic Security (CARES) Act to help break down how the act’s removal of the cap on charitable cash contributions could help you.
Understanding the CARES Act and its impact on your taxes
In March 2020, a tax benefit was introduced via the coronavirus stimulus bill, labeled as the CARES Act. It’s primarily known for providing stimulus payments, but did you know it also included potential relief for your taxes, too?
Intended to help 501(c)(3) qualified organizations affected by decreased contributions, the CARES act removes the income-related cap on charitable contributions.
Breaking down the CARES Act
I sat down with World Vision’s senior director of accounting and reporting, Eric Wetterling, in the Finance division to understand the tax benefit. “In a normal tax year, if you itemize, you can elect to deduct charitable contributions equal to up to 60% of your adjustable gross income (AGI),” explains Wetterling. “However, in 2020, the CARES Act allows you to deduct up to 100% of AGI.”
Here’s an example when you itemize:
Adjusted gross income: $100,000
- 2019 maximum deductible charitable contribution: 60%, or $60,000
- 2020 maximum deductible charitable contribution: 100%, or $100,000
Why donate all of your income? Wetterling suggested multiple reasons: Your savings/investments or spouse provide enough finances to meet your needs; you enjoy working but don’t need the pay nor the tax burden that accompanies the paycheck; you would rather use more of your income to bless others. Either way, the CARES Act temporarily removes the cap and gives you the flexibility to max your contributions this year.
Take a look at an example when you don’t itemize:
The CARES Act provides an additional incentive for you to give regardless of your financial situation. “A deduction of up to $300 for charitable giving can be claimed in addition to the standard deduction,” says Wetterling.
Adjusted gross income: $58,000
- Standard deduction taken as single taxpayer filing separately: $12,400
- 2020 charitable contributions: $200
- Total deductions taken in 2020: $12,600 (standard deduction + $200 given to charity)
Donating additional income could lower your tax requirement
Giving charitable contributions not only can reduce your tax payment, it blesses others. Every charitable donation you make to a nonprofit potentially “reduces” your income on your year-end taxes. The more you give, the less income on which you’re taxed. An example:
Adjusted gross income: $100,000
- Charitable contributions: $82,000
- Taxable income: $18,000
Depending on you and your spouse’s combined income, this could potentially lower your taxes owed for the year.
Should you itemize your taxes? Six reasons from the IRS you should know
The standard federal deduction for 2020 rises for every taxpayer:
- $400, up to $24,800, for married couples filing jointly
- $200, up to $12,400, for single taxpayers and married individuals filing separately
- $300, up to $18,650, for individuals filing as heads of households
While many individuals find it easier and more advantageous to take the standard deduction, ask these six questions of your financial status before doing so:
- Can I not use the standard deduction or the amount I can claim is limited?
- Did I pay large medical or dental expenses out-of-pocket?
- Did I pay interest or taxes on my home(s)?
- Did I have large uninsured casualty or theft losses from a federally declared disaster?
- Did I pay large “other itemized deductions” on line 16 of Schedule A (Form 1040 or 1040-SR) on the IRS website?
- Did I make a large contribution to a qualified charity (like World Vision)?
When and what to ask a financial advisor before year-end
So — you’re ready to give more, donate to various funds, and potentially even be advantageous in regards to your tax bracket (woohoo!). Where to start? “Check with a financial professional,” says Wetterling. Professionals include tax and investment advisors. They should be able to answer your questions, and, depending on who you choose, can even help you craft a future plan for your money.
Not sure if you gave enough to make the tax impact you want? Start sorting through your receipts. A great place to start is your emails; most organizations automatically send an e-receipt with every electronic donation.
If you gave to World Vision — be it a year-end gift, child sponsorship, or through our World Vision Gift Catalog — you should have received an email receipt for each transaction. You may have an account that tracks your donations on myworldvision.org. Sit down with your financials, review the information available to you, and of course — pray about it! Hebrews 13:16 tells us, “And do not forget to do good and to share with others, for with such sacrifices God is pleased” (NIV).
There’s still time to give. Improve the world — and your tax return. Donate now.
The information contained in this communication is for your consideration only and is not intended as legal or tax advice. To determine the applicability of this information to your situation, please consult your attorney or tax advisor.