IRS Tax Breaks Individuals Can Claim for 2020

Four of my 2020 columns covered changes in the rules for charitable contributions. See my piece about tax code changes from October, my article entitled “IRS offers Modest Tax Breaks for Modest Donations” from July, the May article that answered questions about itemization and charitable tax deductions and “New Deduction Strategies for Charitable Contributions,” published in April.

This column focuses on changes for calendar years 2020 and 2021 that introduce modest tax breaks for most individuals. Who qualifies for these tax trimmers? Only individuals who claim the standard deduction amounts that are available to nonitemizers who don’t use Form 1040’s Schedule A.

How many taxpayers are nonitemizers? Close to 90 percent of them, says the IRS.

Previously, there were long-standing restrictions on who could claim contributions to charitable organizations like churches, schools and hospitals. Only taxpayers who used Schedule A to itemize their write-offs for donations, as well as other outlays like medical expenses, state and local income and property taxes and interest payments for mortgages on personal residences.

What happens when donors write checks to charities and then find out that the only way for them to lose less to the IRS is to skip Schedule A and become nonitemizers who claim the standard deduction? They forfeit all their deductions for contributions. Consequently, enough nonitemizers to notice decided to decrease their donations to charitable organizations.

Their decision hurts charities, says a New York Times article of July 25th, 2020, “Charities Now In Need of Aid To Stay Afloat.” The article notes that charities like YMCAs 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.”

How did our lawmakers respond to decreased donations and withering press coverage like the Times’s article? They decided to encourage nonitemizers to increase their donations.

Congress told the IRS to replace the old rules with new ones that are available just for calendar years 2020 and 2021. The 2020 and 2021 rules allow nonitemizers to claim some contributions and still use their standard deductions. Congress set ceilings on the new deductions.

2020’s version of the 1040 form allows amounts of as much as $300 per return for married couples filing joint returns and single filers. They shrink to $150 for married couples filing separate returns.

2021’s version of the 1040 form doubles the allowable amounts to $600 for married couples filing joint returns and $300 for married couples filing separate returns. They remain $300 for single filers.

While Congress thought creating new deductions would encourage donations, that didn’t happen. Why the reverse happened is a no-brainer. Savvy donors figured out that diminutive incentives trim their taxes by diminutive amounts.

To illustrate, joint filers John and Blanche expect 2021’s top bracket to be 22 percent (taxable income between $81,051 and $172,750). A $600 write-off decreases their taxes by $132.

Suppose John and Blanche also need to reckon with state income taxes and expect their top tax bracket to be 5 percent. A $600 deduction for donations decreases their state taxes by $30. Their total tax decrease is $162 ($132 federal and $30 state).

Let’s turn to what’s new on 2020’s Form 1040. Where on the return do filers who take the standard deduction claim charitable deductions? On line 10b on the first page of the 1040, something they likely again will do on 2021’s 1040. The old rules return on 2022’s 1040, unless Congress authorizes an extension of the new rules beyond 2021.

Dear Readers: 2021 isn’t an election year; don’t count on Congress to authorize an increase in 2021’s write-offs beyond $600. Still, if nonprofits continue to be in financial jeopardy, there’s lots of time for Congress to respond to their plight and venture well north of $600. If it does, 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).