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Remember to Ask Tax Clients About Charitable Donations

Nearly 90% of taxpayers today cannot itemize their deductions when filing their federal tax returns. But, thanks to recent legislation, taxpayers who can’t itemize but made charitable donations can increase their standard deduction for 2021 by up to $600 ($300 MFS).  While not a large tax break, tax professionals are encouraged to ask their clients if they made monetary contributions during 2021; they just might receive a tax break for doing so.

By Tom O’Saben, EA
Assistant Director, Professional Development & Outreach
U. of I. Tax School
Tom O'Saben, EA


Remember to Ask Tax Clients About Charitable Donations

Hello again, everybody. Tom O’Saben from the University of Illinois Tax School, coming to you with our tax season blog of the week. This week, we’re going to remind you not to forget to ask about charitable contributions. Here’s my information, which will also be shown at the link at the end of this presentation for those of you who don’t know me and want to find out more information.

Tax Cut and Jobs Act Impacted Charitable Contributions

So as we get an overview of this section, we’re going to go a little bit back into time, and to realize that when we had the Tax Cut Jobs Act of 2017, (TCJA), that went into effect in the 2018, we saw a really large increase to standard deductions. So for a lot of taxpayers, that provided a situation where their charitable contributions no longer made any difference. In other words, they didn’t provide an ability for the taxpayer to be able to itemize deductions unless they were forced to. So beginning with the ideas, we would show our taxpayers in 2018. We said, unless you’re giving a substantial amount to charities, there’s really nothing we can do, you’re going to get lost within that standard deduction.

The Cares Act and Consolidated Appropriations Act

So we talk about those people who then had a change coming along with the Cares Act for 2020, where the Cares Act, and I show it to you here, within our presentation, that the Cares Act for 2020 came along and said, well, we got an idea here for you, we’re going to go ahead and allow a $300 adjustment to income for those taxpayers who don’t have enough to itemize. But yet they’ve made at least $300 in cash donations. And I think that’s worth circling over here. We’re talking about money, no property. That’s one of the concerns that we have did they have at least $300 in cash donations. And if they did, and they’re unable to itemize, then for 2020, they could add $300, as we’re showing here, could add $300 to their standard deduction. And in 2021, those returns that the clients you’re meeting with right now, still, don’t forget that for 2021. The Consolidated Appropriations Act at the end of 2020, actually increased this $300 to $600. for married couples filing jointly, it’s still $300 if we’re looking at any other filing status, including married filing separately. But for 2021, it is in fact, a $600. And this is a little bit different. And you’ve probably run into this, it’s an adjustment to taxable income. So it happens after AGI but it is as much as $600. Now, that may not sound like very much. But for those clients who again, don’t have enough to itemize, we have a circumstance where at least they can get another $600 deduction. If you’re perhaps in an average of a 20% tax bracket, you could be looking at saving $120. Now, that’s not a huge amount of money. But it is something for our clients. But a couple of points I want to make here. And the thing I was thinking about for today was actually the notion that we know we can only talk about money. And we’re talking about those contributions to 50% qualified charities like churches, for example, those types of types of organizations. And we’re not talking about those gifts of clothing, and such to Goodwill or even capital gain property. And more importantly, there’s no carryover. So we could actually have clients that it’d be a real shame, but it’s just a fact of life, that they could have made several thousand dollars of contributions and only benefit to the tune of the $600 limitation. And that’s kind of a sad state of affairs, because there is nowhere that I can find – and if anybody would find something I wish you would go ahead and share that with me – that I can’t find anywhere that there’s any carryover of unused deductions, when in fact, we are not itemizing deductions. In other words, we don’t have the ability to itemize. We didn’t force itemized deductions. We took the standard deduction, therefore we got limited to the $600. And there is no carryover. I think that’s an important consideration to realize.

And, as far as I know, today, everything that I’m reading, although anything could change, there’s no provision that I am aware of that says this $600 is going to be extended beyond 2021. So those clients who are sitting with you right now, and they’re saying so what do I do for next year? Should I keep track of my charities? The answer becomes we’re not sure. Probably a good idea. But what we know today is that there is no extension of the $300 in 2020, or the $600 for 2021, as far as we are currently aware.

So again, what about those amounts above those limits? It’s just, it’s just gone. There is no carryover. So I’m starting to think ahead as what can we do? Or what kind of planning might we have for our clients going into 2022. And we’ll get to that thought process in just a little bit.

I want to tell you, first of all, there are some resources for you to go to, if you’re looking for more information about the expansion, for example, the IRS newsroom, expanded tax benefits up to $600 for non itemizes here’s one resource for you. IRS newsroom: Expanded tax benefits

Here’s another resource that’s very helpful. And that will be IRS Pub 526. It’s going to have a lot of information in there about how to handle cash and non-cash donations, and give you some idea between 50% organizations, qualified charitable donations, non-qualified donations, 50% organizations, 30% limits, 20% limits that would help you in some of this discussion, which I think in 2021 doesn’t carry a lot of weight except for your high contributing clients. But nonetheless, I think the resource is very useful.

Another source, as I’m talking about here, what kind of charity is the organization that your client gave money to? If you have the time to say, hmm, I’m wondering if this contribution my client made to the blank, what kind of an organization is that? And how will we handle that going forward? Again, we’ve got another tool here for you: Take a look at what information is provided by IRS as a tool to help us with our clients.

So here’s some thoughts now. So think about – is it possible that we have contribution carryovers that are coming from 2018 and moving forward? So, I want you to think of this as we’re describing this almost in two different scenarios. So in 2020 and 2021, clients don’t have enough to itemize. So we took the $300 or $600. By the way, there had to be new money, no carryover from prior years. So now these laws go away. And we’re planning into 2022. Do we need to look back and say, do we have a circumstance where we have had carryover perhaps when we had the Tax Cut and Jobs Act that took the 50% of AGI limitation up to 60%? We might remember that. So there could have been some carry over. And I’m only aware that we can carry unused charitable contributions forward. I’m not aware of any provisions that allow you to carry them back. So we had that 60% limitation that came along with the Tax Cut and Jobs Act in 2018. So then we had in 2020, so we got 2019 would still be 60% under TCGA. 2020 comes along under the Cares Act, and says okay, we’re going to have 100% of AGI limitation for 2020. And then the Consolidated Appropriations Act extended that 100% of AGI limitation through 2021. That’s Public Law 116-260 that I have here. That’s the Consolidated Appropriations Act, portion, provision 213, which extended that 2205 code section from Cares through 2021. So we’ve got a lot of these laws where this law impacts this law, which impacts this law as changed by this law. So as all this dust clears now without anything else changing, I want your mindset now to go back to okay, we use the $300 or the $600 because we don’t have enough to itemize deductions. Do we have potentially a situation going back to 2018 where we did itemize deductions or 2019. We did itemized deductions, and we didn’t get beyond 60% of AGI so we carried them forward. And oh, by the way, we also have to watch with these $300 and $600 contributions that donor advised funds do not qualify for those amounts. Just like we know that we can’t use gifts of property. We have to have gifts of money within the current year. No carryover, also no donor advised funds.

So as your clients are leaving their 2021 meeting, and we’re looking into a new world of 2022 without perhaps significant legislation, I’m not aware of any right now, that would impact this area of taxation. But it looks like we’re going to be back to some more years of TCJA. TCJA was supposed to run from 2018 through 2025? Well, 2025 is kind of starting to loom in the back window a little bit. The lights are getting brighter, aren’t they, the headlights coming at us? So it looks like for 2022, we’re gonna be back to that 60% limitation under TCJA. So the provisions under the Cares Act, and the Consolidated Appropriations Act, they go away.

Potential Benefits of Bundling Larger Contributions

So as our clients are talking with us before they leave our meeting, and we mentioned to them, we are not going to get the $300 or $600 next year, they say, well, what can I do? Well, we need to talk to them. And this is going to be in some limited situations, I have to agree. Are they contemplating some large contributions? Is there perhaps a building program at their church, or they want to make a big contribution perhaps to their alma mater? Is there a possibility of bundling contributions? In other words, instead of doing something over a series of years, would it make sense to do more at once? Would that get us to the position of where we have enough to itemize deductions? And plus, we got to go and look back and say, do we have any carryover that’s been bouncing along because we took the standard deduction? Could we have some carryover that when coupled with a bundling of contributions that may have been intended to do over several years, do those in 2022, or 2023, looking for a bigger bang from one lump sum over as opposed to a series of smaller contributions. Might be something to think about.

Qualified Charitable Distributions and RMD Clients

One other point I want to mention in this area, don’t forget about the Qualified Charitable Distributions for your RMD clients. Again, this was a big deal that came out of TCGA. Not that it came out of TCGA, because Qualified Charitable Distributions have been around for a long, long time. But they certainly have picked up prominence with the Tax Cut and Jobs Act, and those resulting much, much higher standard deduction. So number one thing is when those clients are with you, and you see that they have 1099-Rs for distributions, and they also happen to be charitable people ask them, did you have your IRA custodian send money directly to a charity. Because the 1099-R is not going to tell us, I’ll tell you one giveaway might be for those clients who are in RMD years – remember, they’ve got to be in RMD years. You can’t have a 60 year old, who directs money to a charity from their IRA, qualify for a qualified charitable distribution. They have to be in RMD years, which I believe are still defined as 70 and a half or over. So that would be something maybe to check out. However, one of the keys to it might be, if you see a 1099-R from an IRA, and it doesn’t have any withholding. All I want you to do is have that as a memory jogger. It isn’t a sure indication, but it is certainly one where you want to ask a question. It could also be for a younger client. They may have done a backdoor Roth contribution, where they did a traditional IRA contribution, and they’re immediately converting it to a Roth. That could be a backdoor Roth. But let’s stay with charities, the conversation we’re having right now. So if nothing else in these in these last few weeks of the pressure of filing season, we’re all tired. We’re functioning on adrenaline and caffeine. If you if you need a memory jogger, oh yeah, I’m seeing a 1099-R here from an IRA. It doesn’t have any withholding, my client is in RMD years, they tend to be charitable people, are we in fact, looking at a circumstance where we have a qualified charitable distribution, and remember, those can be up to $100,000. They’re not limited to the RMD for the year. But one of the changes the Secure Act made was if people are still working after they hit RMD, those contributions they may make to an IRA, while they go into the calculation for what the RMD is, those post RMD year contributions to IRAs do not qualify for an amount that would be a QCD. So keep that in mind as you’re going through here.

Just some thoughts. I like you. I think we need some memory jogger something to say oh, yeah, I need to ask that question. As we’re getting really, really tired, and we’re running to the finish line. And I know how clients will come in and say, Boy, I bet you’re really getting busy. And I like to describe to clients that “no, it’s not a sprint, it’s a marathon.” And we’re coming into the final turn of that marathon. And we’re hoping to get there with our heads held high. So everyone here at the University of Illinois Tax School is with you. We’re going to help you get through these last few weeks. We’ll come up with some more timely ideas as we go through the waning days, Join our Facebook Group if you’re not already on it, post your questions out there or you happen to have expertise in a certain area and you see the questions you got a little bit of time – share it with your fellow professionals. So this will be Tom O’Saben and saying goodbye for just a while for all of us here at the University of Illinois Tax School. Hang in there, my friends.

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