It’s Not Too Late to Designate Your 2021 Charitable Contribution
“What you’re supposed to do when you don’t like a thing is change it. If you can’t change it, change the way you think about it. Don’t complain.” – Maya Angelou
I wish I had answers to some of life’s most complex questions, such as, “what’s the best way to appropriately tax citizens while responsibly funding a government?”. Taxes are a hot-button topic, and, as a tax practitioner, I am in a unique position to have some interesting conversations with people about how they view their tax bill. In the last few weeks surrounding the extended October 15 tax deadline, I heard “the government needs my money more than I do” all the way to “they don’t even know what to do with any of my money up there.” Of course, the truth is somewhere in the middle, but the definition of the middle will vary from person to person.
These conversations kicked my creative side (don’t laugh, accountants can sometimes be creative!) into high gear, especially for figuring out what I can do to help with year-end tax planning to give clients more say in how their income is used for the benefit of individuals in their community or the common good.
Taxes are a function of your income less your appropriate deductions — either standardized or itemized. The standardized deduction is precisely that — a standardized number used on tax returns nationwide based on your filing status. Because the deduction is standardized, you don’t have much say in the calculation of your overall tax bill. However, for 2021 only, if you use the standard deduction, you can take advantage of the “above the line” deduction of up to $600 for married taxpayers ($300 for other filing statuses) for qualified charitable contributions. The “above the line” deduction directly reduces your taxable income and thus your total tax bill while also benefiting a charity of your choosing!
Itemized deductions are primarily a function of medical expenses, state and local taxes, mortgage interest, and charitable contributions. The first items in this list are either limited (medical and state and local taxes) or related to your mortgage, so taxpayers don’t have a lot of say in how those deductions impact their tax return. Charitable contributions, however, provide a wonderful opportunity for those who are financially able and willing to decide and directly influence how their funds are spent within society — rather than letting the government collect taxes on the income and then allocate the government revenue how they see fit.
In particular, larger than normal charitable contributions are a great consideration for the 2021 tax year if you’re itemizing your deductions. In 2021, amounts up to 100% of annual gross income (AGI) may be deducted, essentially taking your tax liability to zero. This 100% deduction is one of my favorite charitable giving tax benefits from the CARES Act of 2020, especially for taxpayers who itemize deductions on Schedule A. If you are in this category, this adjustment means that you have the possibility of using your charitable contributions, giving to organizations you care about and believe in, to reduce your adjusted gross income to $0 in 2021! In a normal year, the cash charitable contribution deduction is limited to 60% of your AGI. For purposes of the expanded 2021 giving thresholds, qualified charitable organizations do not include donor-advised funds or private foundations.
Examples of qualified charitable contributions include:
- Cash donations to 501(c)3 nonprofits – aka public charities
- Cash donations and tithes to churches and religious organizations
- Cash donations to veterans’ organizations
So, are you interested in increasing your cash giving but need ideas? Think about what causes are important to you, whether they relate to children, the arts, animals, the environment, or other areas. Some of my personal favorite local charities include Chattanooga Area Food Bank, Chattanooga Community Kitchen, Girls Inc. of Chattanooga, Hospice of Chattanooga, Northside Neighborhood House, and Reflection Riding.
For those of you who receive required minimum distributions from your retirement accounts, please reach out to your tax preparer to discuss qualified charitable distributions (QCDs). QCDs are another valuable planning tool to help minimize your tax liability and are worthy of their own future update. You can also read about IRA QDCs on our website.
If you are inclined to increase your charitable giving in these last few weeks of 2021, I encourage you to reach out to your tax advisor to learn more about the possible tax benefits. Or, if you are looking to make charitable gifts this holiday season in accordance with your estate and tax plans, our estate and tax team is ready to assist you!