Millions of Americans making charitable donations this Giving Tuesday or any other time this year can take advantage of a certain tax break, and it might be their last chance for a while.
Under current tax law, people who take the standard deduction on their tax returns can also take a tax deduction for charitable contributions up to $300. The deduction is up to $600 for married couple filing jointly.
The $600 boost can be a boon to a married couple’s tax bill, said Mark Steber, chief tax information officer at Jackson Hewitt, the national tax preparation chain. A couple making around $75,000 to $80,000 and facing an effective tax rate of 25% could take $150 off their tax bill with $600 in charitable contributions, Steber estimated.
Prior to the pandemic, if taxpayers wanted to tap a charitable donation’s tax rewards, they had to itemize all of their tax deductions, including charitable contributions. But most people opt for the standard deduction, said Erica York, an economist at the Tax Foundation. “For most people, there are no tax benefits for giving,” she noted.
That changed during the pandemic.
In a bid to encourage charitable giving at a time when so many Americans needed help, the $2.2 trillion CARES Act, passed in March 2020, allowed a $300 “above-the-line” deduction for individuals and married couples making charitable donations. That write-off applied to eligible donations through the end of 2020. The CARES Act also broadened the tax rules for people itemizing their charitable contributions.
A household that earned $75,000 in taxable income last year could have reduced its federal tax bill by $36 with a $300 deduction, according to one theoretical projection. A household with $100,000 of taxable income would have shaved $66 off its tax liability, one expert previously told MarketWatch.
The total size of last year’s donations broke records. Charities took in an estimated $471 billion, according to a report from the Giving USA Foundation.
Congress broadened the deduction when it passed a $900 billion omnibus spending bill at the end of 2020 that also authorized steps like a second round of stimulus checks. The same $300 deduction applied for individuals in 2021, but married couples could now get a donation for up to $600 in charitable contributions.
The provision is currently slated to expire at the end of this year, York and Steber noted. The $1.75 trillion social safety net bill that passed the U.S. House of Representatives earlier this month is filled with new tax provisions — like more taxes on the rich and corporations — but it does not contain provisions related to charitable giving, York said. The bill still needs to pass the Senate.
It’s possible the charity-related deductions could live longer through other legislation, but that remains to be seen, she noted. Either way, York said she didn’t think potential tax benefits are “the big motivation for most American giving.”
Nearly half (47%) of people said passion for a cause was the top reason they donated to specific nonprofits, according to a recent survey from Classy, a donation platform. Just 4% said the tax deduction was the top reason.
Steber said he wouldn’t be surprised if the break gets extended somehow. “It’s very popular with taxpayers, it’s popular with charities, it’s the right thing to do,” he said.
The Internal Revenue Service notes that eligible donations under the write-off must be cash contributions. Generally speaking, taxpayers should get written acknowledgements for contributions above $250, the IRS said.
People considering donations to organizations can confirm the entity’s nonprofit status via the IRS’ tax exempt organization search tool.
The deduction can be a way to simultaneously do some good with simple end-of-year donations while also reducing a household’s tax liability, Steber said, adding, “Don’t overlook a nice, easy-to-get tax break.”