Americans opened their hearts and wallets for another record-breaking Giving Tuesday. It's estimated that 35 million U.S. adults participated in 2021, with total gifts of $2.7 billion, a 9% increase from 2020.
While most aren't shelling out for tax purposes, they may not know there's a special write-off for their generosity, even if they don't itemize deductions on their federal return.
In response to the Covid-19 pandemic, Congress gave charities a boost in 2020 by offering Americans a tax incentive for cash gifts. Lawmakers extended the write-off for 2021.
Single filers can claim a deduction for cash donations up to $300 and married couples filing together may get up to $600 in 2021.
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"This is a unique opportunity to take advantage of a temporary tax benefit," said Juan Ros, certified financial planner at Forum Financial Management in Thousand Oaks, California.
With nearly 90% of filers using the standard deduction, it can be difficult for the average American to claim tax breaks for smaller charitable gifts since they must itemize to receive the benefit.
However, the temporary law allows those taking the standard deduction of $12,550 for single filers or $25,100 for married taxpayers to qualify in 2021.
"This means anyone can deduct a cash contribution to a qualifying charitable organization even if the taxpayer is unable to itemize deductions," said David Haas, a CFP and president of Cereus Financial Advisors in Franklin Lakes, New Jersey.
The cash gift, including payments by check, credit card or debit card, must go to a qualified charity. Transfers to a donor-advised fund or private foundation don't count.
Qualified charitable distributions
Retirees age 70½ and older can also score a tax break without itemizing through so-called qualified charitable distributions, which are payments from an individual retirement account to a charity.
To qualify, the funds must go directly to an eligible charity from an IRA, said Sean Michael Pearson, a CFP and associate vice president at Ameriprise Financial Services, LLC in Conshohocken, Pennsylvania.
There's a $100,000 limit for qualified charitable distributions per donor every year. However, married couples filing jointly may each transfer $100,000 from their separate IRAs.
The primary benefit is the transfer doesn't count as taxable income, Pearson explained, and retirees don't need to itemize deductions to see that benefit.
By reducing adjusted gross income, some retirees may avoid triggering other tax consequences, such as future premium hikes for Medicare Part B and Part D, among other issues.
For 2022, higher-income retirees may pay anywhere from $238.10 to $578.30 for Part B each month, depending on modified adjusted gross income.
Moreover, the transfer may cover required minimum distributions — amounts that must be withdrawn from most retirement accounts by a certain age — which are back in force after a 2020 suspension.
"It's something that you absolutely can do before the end of the year," Pearson added.
Bigger write-offs for itemizers
While tax breaks up to $600 are a perk for many filers, some donors may use a "bunching" technique by making several years of gifts at once to exceed the standard deduction thresholds.
And those who itemize may get a bigger write-off by gifting other types of assets.
For example, if someone has appreciated stocks or other investments held for more than one year in their taxable portfolio, they may consider transferring those assets to charity.
Here's why: In addition to the deduction, the donation may avoid capital gains taxes of 0%, 15% or 20% for 2021, depending on income.
To make it work, investors must give the assets directly to the organization rather than selling and donating the proceeds.
The move may also offer the chance to rebalance a taxable portfolio, depending on a client's risk tolerance and long-term investing goals.
"This is an excellent opportunity for someone who has invested in an asset that has performed well and wants to diversify their holdings but doesn't want the capital gains hit," said Danielle Harrison, a CFP, fee-only financial planner and founder of Harrison Financial Planning in Columbia, Missouri.
Of course, there are many factors to consider, and a tax professional may provide guidance for the optimal strategy.