• How have charitable contributions changed since the CARES Act?
  • What to expect for next year’s filing season?

Background & Summary

The CARES Act of 2020 was first passed to establish benefits for taxpayers struggling in the midst of the pandemic-started recession. Among these benefits included a temporary enhanced charitable deduction: up to $300 for both single or married non-itemizing taxpayers on 2020 tax returns. This deduction acted as an “above-the-line” write-off, which meant it could be used to effectively lower adjusted gross income (AGI).

Congress recently extended this benefit and bumped the amount up to $600 for married couples filing jointly for 2021.

The problem? A draft of the 2021 Federal 1040 Form indicates that the deduction will no longer remain above-the-line and, as such, will not work to lower AGI. According to one source: “Historically, taxpayers have seen two types of deductions: above-the-line, affecting adjusted gross income, or below-the-line, which filers must itemize to claim… But the charitable deduction for 2021 falls into a third ‘in-between” category.'”

Whereas in 2020, the $300 deduction worked to lower income, in 2021, the $300/$600 deduction will not affect AGI. The debate over whether to itemize or take the standard deduction is moot. The real question is: will this change affect my other tax items that depend upon AGI for their calculation?

Implications

A majority of taxpayers won’t notice any difference — only those who are on the cusp of tax brackets need to take note.

Since the deduction doesn’t lower AGI, those on the edge of a certain tax bracket may bump in and out of new tax standings, ultimately affecting tax-related deductions that are based on a taxpayer’s AGI like student loan interest, tax credit rates and eligibility, and Medicare premiums.

Example

In 2020, a single-filer earns $10,000 in wages and uses the $300 above-the-line deduction to lower AGI to $9,700. As such, the taxpayer is in the lowest tax bracket ($0 – $9,875 AGI).

In 2021, a single-filer earns $10,000 in wages. Since the $300 is not above-the-line and does not affect AGI, the taxpayer’s AGI remains $10,000. As such, the taxpayer bumps to the next tax bracket ($9,876 – $40,125 AGI).

Since the taxpayer is in a higher tax bracket, they may lose some tax benefits.

To learn more about how these changes might affect your tax standing, call the pros at DSJCPA: 516-541-6549. And don’t forget to visit our website to stay up to date.

Devin McQuillan
Associate, Creative Solutions

Contact:
516-541-6549 | Email

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