IRS Offers Modest Tax Break for Modest Donations

Usually, taxpayers can’t claim contributions when it’s more advantageous for them to use one of the standard deduction amounts that are available to filers who don’t itemize. Our lawmakers recently suspended those long-standing rules for calendar year 2020 and replaced them with temporary ones that permit taxpayers who don’t use Schedule A to claim as much as $300 for charitable contributions.

Jul 30th 2020
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Way back when, our lawmakers told the IRS to craft rules that allow taxpayers to deduct donations to religious organizations, educational institutions, and the like only if they itemize on Form 1040’s Schedule A. The limitation means that they can’t claim contributions when it’s more advantageous for them to use one of the standard deduction amounts that are available to filers who don’t itemize.

Our lawmakers recently suspended those long-standing rules for calendar year 2020 and replaced them with temporary ones that permit taxpayers who don’t use Schedule A to claim as much as $300 for charitable contributions.

Let’s pivot to FAQs about 2020’s rules that were sent to me and that I’ve edited for clarity and length.

Q. When I submit 2020’s version of the 1040 form, where will I claim those donations?

A. On the expanded version of 1040’s Schedule 1 (Additional Income and Adjustments to Income).

Q. Why are all filers supposed to use Schedule 1?

A. Because Schedule 1’s adjustments authorize write-offs that all filers can claim, regardless of whether they itemize or use the standard deduction—for instance, their contributions to traditional IRAs and other kinds of tax-deferred retirement plans. Adjustments, by the way, used to be called above-the-line deductions.  

Q. How does it help filers when 2020’s filing instructions tell them to claim the $300 on Schedule 1?

A. They can use the standard deduction—precisely what they were unable to do under the old rules for 2019 and earlier years. 

Q. What awaits filers when they submit 2021’s version of the 1040 form?

A. The old rules are back on the books.

Spoiler alert: My responses to queries include a standard comment that I’m able to say with complete confidence that there can be no two opinions about whether $300 write-offs will encourage donors to write checks.

Q. Why are you so sure that most donors will be indifferent?

A. At best, the deductions are modest incentives, though my experience is that donors prefer deductions, albeit diminutive ones, to trinkets like calendars and tote bags. And they need no reminders that diminutive incentives, lower their tax tabs by diminutive amounts.

An example: John and Blanche Bickerson are going to file jointly for 2020. They expect their top bracket to be 22 percent (taxable income between $80,251 and $171,050). All that a $300 deduction on Schedule 1 would accomplish is to decrease their taxes by $66.

Q. Could the Bickersons qualify for another break?

A. They might. Assume their Schedule A deductions include uninsured medical expenses that exceed the nondeductible threshold for such expenses of 7.5 percent of adjusted gross income.

An additional medical deduction of $23 ($300 times 7.5 percent) reduces taxes by another $5. Their aggregate reduction in federal income taxes becomes $71 (the sum of $66 plus $5).

Q. What if the Bickersons also need to reckon with state income taxes, and their top bracket is 8 percent?

A. All that deductions of $300 for donations and $23 for medical expenses would accomplish is to decrease their state taxes by $26.

My recommendation on how the couple could spend their tax reductions of $97 ($71 for federal and $26 for state): I told Francophiles John and Blanche to stay local and blow the $97 on a family outing at their favorite bistro, Le Chateau Internacional de Pancakes.

Q. Do you really think $97 is going to cover the tab?

A. It all depends, among other things, on whether John and Blanche are the only diners or they invite others to celebrate their tax reductions, whether they and their guests crave pancakes or lobsters, and how generously they tip.

Stay tuned. As of now, it’s uncertain whether our lawmakers intended the $300 deduction for single persons to double to $600 for joint filers. Presumably, the IRS will resolve the uncertainty.

But any IRS response might be premature in light of recent media coverage, such as a page-one article in the New York Times for July 25th, “Charities Now In Need of Aid To Stay Afloat.” The article notes that “A group of more than 3,800 nonprofits recently sent a letter asking congressional leaders to increase the tax deduction for charitable contributions.”

Dear Readers: In case you hadn’t noticed, this is an election year. So count on members of Congress, especially the ones scrambling to retain their seats for another term, to be responsive to their constituents. And count on AccountingWeb to report the response.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

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