How to Unlock the New CARES Act Charitable Deduction

Written by: Grayson Blazek

The CARES Act, passed in response to the Coronavirus Pandemic, brought with it numerous financial planning opportunities. This includes a new deduction to utilize for charitable gifting. In 2020, taxpayers will be able to deduct the first $300 in charitable gifts they make on their 2020 tax return as an above the line deduction – reducing their Adjusted Gross Income.

The goal of including this deduction in the bill was to provide a tax benefit, even for those who use the Standard Deduction, to maintain or increase charitable giving during difficult financial times for many. In the past, only taxpayers who itemize deductions were able to obtain a direct tax benefit for their charitable gifts. With the increased Standard Deductions included in 2017’s tax reform, the number of taxpayers who continue to itemize their deductions is down to approximately 10%.

There are a few rules that must be followed in order to utilize the new above the line deduction:

  1. The gift must be made in cash (or check/credit card). For purposes of this deduction, donations of household goods or clothing to Goodwill, for example, will not qualify. Donations made to Donor Advised Funds will also not qualify. It is always a good idea to obtain a receipt of your gift when possible to substantiate the deduction.
  2. The gift must be made to a qualified 501(c)(3) charitable organization.
  3. You must use the Standard Deduction. For taxpayers who plan to itemize their deductions, they will include their charitable gifts along with their other itemized deductions. You will not be allowed to split or divide your gifts to obtain both the above the line deduction and itemize your deductions.
  4. The gift must be made by December 31st, 2020 in order to qualify.

While the tax savings generated by utilizing this strategy will be limited to the taxpayer’s marginal tax rate times the gift (up to $300 per taxpayer), it can be viewed as an incentive to begin or to maintain altruistic goals.

If you are new to gifting or would like to explore charities for causes you believe in, there are numerous charity evaluators available online. These tools are great for aggregating local, national and global options. They also provide reviews of the financial health of the organizations and how they use taxpayer donations.

Related: CARES Act Considerations for Business Owners and Ultra High-Net-Worth Individuals