More Tax Code Changes for Individuals in 2020

The year 2020 has been filled with change, and the tax code is no exception to this. Recently, yet another occurred: Taxpayers are now temporarily allowed to deduct charitable contributions. Julian Block explains.

Oct 7th 2020
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The tax code allows individuals to deduct donations to charities only if they itemize on Form 1040’s Schedule A. They can’t claim contributions when they use the standard deduction amounts that are available to filers who don’t itemize.

A recent law change authorized a one-year suspension of those rules for calendar year 2020. The temporary change permits taxpayers who aren’t itemizers to claim as much as $300 for charitable contributions and also take the standard deduction.

Here are some FAQs about the new deduction.

Q. Where do filers claim the $300 on 2020’s version of the 1040 form?

A. According to the draft version that the IRS released in late August, they claim it on line 10b (“Charitable contributions if you take the standard deduction”) of the 1040’s Schedule 1 (Additional Income and Adjustments to Income).

Q. Why Schedule 1?

A. Because Schedule 1’s adjustments (they used to be called above-the-line deductions) authorize write-offs that all filers can claim—for, instance, their contributions to IRAs. It makes no difference that they’re itemizers or take standard deductions.  

Q. What’s in it for filers who claim the $300?

A. They also get to use the standard deduction amounts—something they couldn’t do under the old rules for 2019 and earlier years. 

Q. Will filers be able to claim the $300 on their 1040s for 2021?

A. No, unless there’s another one-year suspension for 2021.

Q. The rationale for $300 write-offs is that they encourage donations to charities. Is that going to happen?

A. Probably not. Savvy donors are aware that diminutive incentives trim their taxes by diminutive amounts.

To illustrate, joint filers John and Blanche expect 2020’s top bracket to be 22 percent (taxable income between $80,251 and $171,050). A $300 write-off decreases their taxes by $66.

Q. Deductions on Schedule 1 affect what they’re allowed to claim for medical deductions on Schedule A. Would there be a further decrease in their taxes?

A. Only if their deductions for uninsured medical expenses exceed the nondeductible threshold for such expenditures— 7.5 percent of adjusted gross income. An additional $23 deduction ($300 times 7.5 percent) decreases taxes by another $5. Their aggregate decrease in taxes is $71 (the sum of $66 plus $5).

Q. Suppose John and Blanche also need to reckon with state income taxes, and expect their top bracket to be 8 percent. How does that play out?

A. 1040 deductions of $300 for donations and $23 for medical expenses decrease state taxes by $26. The total tax decrease is $97 ($71 federal and $26 state).

Never say never. While Congress could authorize a last-minute increase in $300 write-offs for 2020, don’t expect that kind of response from lawmakers who are indifferent to withering media coverage.

Consider, for example, a page-one article in the New York Times for July 25th, 2020, entitled “Charities Now In Need of Aid To Stay Afloat.” It 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.” Charities, says the Times reporter, find themselves in financial jeopardy just as they’re needed most by Americans who rely on them for “social services, medical care and spiritual needs.”

But Congress could authorize another one-year suspension for 2021. If so, maybe it will be responsive to the plight of nonprofits and venture well north of $300.

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