Tax Twist to Charitable Deduction for Nonitemizers

When your married clients are ready to file their 2020 taxes, it's important for them to be aware of the "marriage penalty" included in the TCJA, as well as perfectly legal ways to get around it and put a little extra cash in their pockets come IRS tax refund time.

Nov 18th 2020
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In the past, the “marriage penalty” has plagued certain married couples that file joint tax returns. Despite certain changes in the Tax Cuts and Jobs Act (TCJA), effective for 2018 through 2025, the penalty still exists for some high-income taxpayers. Now you can add another drawback: the new $300 deduction for charitable gifts by nonitemizers.

The $300 deduction for nonitemizers was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is available on the 2020 returns your clients will file in 2021.

Background: The marriage penalty has often adversely affected a couple where each spouse had roughly the same amount of income. Because of the dollar ranges in the tax brackets, the couple ended up paying more tax as joint filers than they would as single filers. In addition, stacking their income together may have reduced or eliminated deductions with adjusted gross income (AGI) floors like those for medical or miscellaneous expenses.

The TCJA addressed the problem in some tax brackets, but the disparity remains for certain high-income taxpayers. It also created a few new tax complications. For instance, the deduction for state and local tax (SALT) payments is currently limited to $10,000 per year. This substantially hinders joint filers if they collectively have more than $10,000 in SALT payments.

Latest development: Under the CARES Act, nonitemizers can deduct up to $300 of the monetary donations made to qualified charitable organizations in 2020. This includes contributions made in cash, by money order or credit card, etc.  The tax break doesn’t apply, however, to donations made to certain private foundations or donor advised funds. Nor does it include carryovers of excess contributions from prior years.

The deduction is available to a taxpayer who doesn’t choose to itemize deductions and claims the standard deduction instead, but there's a catch. The $300 limit applies regardless of your filing status.

In other words, if you file a joint tax return, the maximum deduction is still $300. In contrast, if a couple files separate tax returns, each one can claim the maximum $300 deduction.  

This adds insult to injury to taxpayers already affected by the marriage penalty. Saving grace: Itemizers can continue to deduct charitable donations within the usual rules.  

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