The latest Covid-19 relief proposal would give generous taxpayers a sweeter tax break for donating to charity.
Senate Majority Leader Mitch McConnell, R-Ky., issued a proposal for pandemic relief on Tuesday afternoon – after quashing a $908 billion bipartisan rescue bill – that called for a second round of Paycheck Protection Program loans for small businesses but no stimulus checks.
McConnell also proposed boosting a new above-the-line deduction that would allow taxpayers to write-off up to $300 in cash donations to charitable organizations for 2020.
Under the CARES Act, people who claim the standard deduction – which is $12,400 for single filers and $24,800 for married-filing-jointly in 2020 — can take a deduction of up to $300 in donations.
McConnell wants to increase that amount to $600 for single taxpayers and $1,200 for married filing jointly.
The move could boost donations, at least marginally – assuming families have the cash for it.
“The motivation is to help charitable organizations, which are seeing a potential decrease in charitable giving, given the state of many households,” said Garrett Watson, senior policy analyst at the Tax Foundation.
“Allowing them to deduct more can incentivize more giving; I suspect it could have a marginal change,” he said.
Fewer people itemizing
Since the Tax Cuts and Jobs Act went into effect in 2018, fewer people have been claiming the tax break for charitable donations.
That’s because the tax overhaul also roughly doubled the standard deduction, resulting in fewer taxpayers taking itemized deductions.
In the 2018 tax year, roughly 17.5 million returns claimed itemized deductions — write-offs that include charitable donations, mortgage interest and other breaks, the IRS found.
That’s down from 46.9 million returns that itemized deductions during the 2017 tax year.
Arrows pointing outwards
In turn, fewer people also claimed a tax break for donations: 14.8 million returns claimed a charitable deduction in 2018, down from 37.9 million in 2017.
The higher your tax bracket, the more of a benefit you reap from a deduction.
A taxpayer who is in the 37% tax bracket gets about $111 in tax savings from a $300 deduction – but it’s worth only $30 to someone in the 10% tax bracket.
“People who are already at the top rate of 37% save over $100 on taxes, but they’re more likely to be itemizing anyway – and they’re already getting the itemized deduction for charitable giving,” said Tim Steffen, CPA and advisor education senior consultant at Pimco.
Tax compliance
By boosting the threshold to $600 in donations for single taxpayers ($1,200 for married couples), there’s a possibility that the number might be just high enough to discourage people from abusing the deduction, said Watson.
“By expanding it, you reduce the number of people who will claim the deduction and not comply with the rules,” he said.
There’s also the chance that charitable organizations might enjoy a short-term boost in funding.
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If you’ve already made your $300 donation by cash, check or credit card, be sure to retain any receipts or documentation you received from the charity, acknowledging the donation.
Meanwhile, if you want to boost that gift to $600 or $1,200, per McConnell’s proposal – don’t count on getting an expanded write-off in 2020.
We still have no idea whether this measure will stick in the next round of relief proposals.
“Will it be helpful for some charities in the near term? Yes,” said Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget.
“Does it have a place in Covid relief legislation? No, it won’t stimulate the economy and it will stimulate donations only on the margin,” he said.
