Q. We are in the last quarter of 2020, thankfully, and my wife and I are considering our year-end planning and charitable giving. My understanding is that some of the tax laws have changed that will affect our 2020 taxes, including charitable deduction changes. What are some special opportunities in 2020 when it comes to giving, considering recent tax law changes? Thanks for your help!
A. As you are aware, 2020 has been a tough year for most of us, so it’s a good thing that it is mid-October and that year-end planning is currently underway!
Several changes will be in effect for your 2020 taxes when it comes to charitable giving, so now is a good time to begin thinking about your year-end planning and how you can take advantage of these tax law changes. Another reason to consider charitable contributions this year if you’re in a position to do so is that they’re needed more than ever. With more than 36 million Americans filing jobless claims during the coronavirus pandemic, food banks and other assistance programs became overwhelmed by the rapidly growing need in communities throughout the country. Nonprofits facing lost and declining revenue due to the pandemic have told Congress they estimate a need for $60 billion in emergency funding to provide services to a growing number of Americans in need, including low-income and older Americans.
If you are able to give and choose to do so this year, here are some ways your taxes filed in 2021 will differ from your prior-year return when it comes to charitable giving:
Charitable Deduction Changes
To encourage U.S. citizens to contribute money to charity during the Coronavirus pandemic, the IRS is allowing you to deduct as much as $300 in cash contributions made during 2020 — even if you go for the standard deduction. (This tax change is also a part of the CARES Act.)
Typically, taxpayers are allowed to write off tax-deductible charitable donations on their federal tax returns if they itemize deductions (as opposed to taking the standard deduction). If you itemize deductions on your 2020 tax return, you aren’t subject to the $300 limit for charitable contributions. In addition, you can elect to deduct cash contributions made in 2020 of up to 100% (increased from 60%) of your adjusted gross income (AGI).
New Standard Deduction Amounts
Standard deductions reduce your taxable income amount, and they typically increase each year due to inflation. For 2020 taxes due in 2021, the standard deduction amounts (based on tax filing status) are:
Married filing jointly: $24,800 — up $400 from 2019 tax returns
Married filing separately: $12,400 — up $200 from 2019 tax returns
Head of household: $18,650 — up $300 from 2019 tax returns
Single: $12,400 — up $200 from 2019 tax returns
How Tax Changes Can Affect Your Year-End Charitable Giving
Year-end is a time when a lot of people think about charitable giving. To encourage more charitable giving in 2020, here’s more details on how the CARES Act provides additional tax relief for donors. This makes it easier to give and save at the same time.
$300 Above-the-Line Deduction (Must Take Standard Deduction)
If you take the standard deduction on your 2020 tax return (the one that you’ll file in 2021), you can claim an “above-the-line” deduction of up to $300 for cash donations to charity you make this year. Donations to donor advised funds and certain organizations that support charities are not deductible. Normally, you have to itemize on Schedule A to get a tax break for charitable donations. In this case, though, it’s the other way around—if you itemize, you can’t take this new deduction.
60% of AGI Limit Waived (Must Itemize)
If you itemize on Schedule A of your tax return, you can claim a deduction for your charitable donations. However, the amount you can deduct for cash contributions is generally limited to 60% of your adjusted gross income (AGI). Any cash donations over that amount can be carried over for up to five years and deducted later.
The CARES Act lifts the 60% of AGI limit for cash donations made in 2020 (although there’s still a 100% of AGI limit on all charitable contributions). That means itemizers can deduct more of their charitable cash contributions this year, which will hopefully boost charitable giving. As with the new above-the-line deduction, donations to donor advised funds and supporting organizations don’t count.
Charitable Giving and Medicaid Eligibility
When it comes to charitable giving, for the average middle-class and upper middle-class family, it’s important to keep Medicaid eligibility requirements in mind. This is especially important for those who may need nursing home care within the next five to ten years.
Medicaid generally presumes that all gifts made in the 5 years prior to filing for Medicaid were made in contemplation of applying for Medicaid. Individuals seeking eligibility for long-term care Medicaid benefits must disclose all gifts made by the individual or his or her spouse within the prior 5 years.
However, if you have a history of giving small weekly or monthly gifts to a charity, some Medicaid agencies will not construe those to be disqualifying gifts. For instance, in Virginia, these types of regular gifts are not penalized so long as they are under $4,000 per year and there was a regular pattern of making this gift for 3 years prior to applying for Medicaid.
Does this potential risk of a Medicaid penalty suggest that all giving should cease? Not necessarily. For more details about this, please see our resource page, “Medicaid: The Perils of Gifting FAQ.”
The Farr Law Firm Can Help with Year-End Planning, Financial Planning, and Medicaid Asset Protection Planning
Whether you’re close to retirement, retired, employed, or recently unemployed, it is important to protect your quality of life and your golden years with estate planning, long-term care planning, and financial planning.
Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care financial advisor through my financial services company, Lifecare Financial Services, LLC.
As always, if you or a loved one are nearing the need for personal care or already receiving personal care, or if you have not done Long-Term Care Planning, Estate Planning, Financial Planning, or Incapacity Planning (or had your planning documents reviewed in the past several years), please call us to make an appointment for an initial consultation:
Fairfax Elder Law Attorney: 703-691-1888
Fredericksburg Elder Law Attorney: 540-479-1435
Rockville Elder Law Attorney: 301-519-8041
DC Elder Law Attorney: 202-587-2797
About Evan H Farr, CELA, CAP
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