As tornado victims in the south and Midwest dig out from the wreckage of the violent weekend storm, tax authorities and nonprofit industry experts highlighted a valuable charitable deduction for small-dollar donors that’s slated to expire in weeks.
It’s a deduction they hope can spark more donations to all kinds of organizations working for the public good, if only more people took full advantage of it.
Right now, individuals can take the standard deduction — which is what most people do — but they can also claim an additional deduction of up to $300 for cash donations to charities this year. For married couples filing jointly, the deduction limit is $600 this year.
Those contributions can do good for the world, and also do good for the size of a taxpayers’ bill. In some instances, a $600 deduction could trim a household’s tax liability by approximately $150, one expert previously told MarketWatch.
Right now, the $300/$600 deduction expires after Dec. 31. Advocates want lawmakers to extend the provision so it applies after that point. Nearly 400 nonprofit organizations wrote Congressional leaders on Tuesday urging them to extend and expand the deduction. The Charitable Giving Coalition said it supported one bill that would raise the cap to approximately $4,000 for individuals and approximately $8,000 for married couples.
An ‘above-the-line’ deduction for charitable donations
Traditionally, the write-off for charitable contributions occurs when people itemize their deductions. But in the pandemic’s early days, lawmakers enacted an “above-the-line” deduction to offer more tax rewards for charitable donations — and hopefully more donations. Above-the-line deductions don’t have to be itemized, a process that usually requires more time and paperwork. A year ago, Congress broadened the rules to their current state.
“The need is great during the second winter of the pandemic,” Sunita Lough, commissioner of the IRS’s Tax Exempt and Government Entities Division, said during a Monday press event highlighting the deduction. “Because of the terrible events in our country with the tornado, the need just keeps getting greater and people are hurting out there.”
People are hurting, and so are the nonprofit organizations that are serving them.
To be sure, charities took in a record $471 billion last year, according to Giving USA. Individual giving accounted for $324 billion, a 1% increase adjusted for inflation.
But that also factors in mega-donors like MacKenzie Scott, the ex-wife of Amazon
founder Jeff Bezos. Scott donated nearly $6 billion last year and has kept up her philanthropic streak this year.
Strip away the high-end donations, and individual charitable gifts would have declined in 2020, said Ben Kershaw, director of public policy and government relations at Independent Sector, a coalition of nonprofits and foundations.
Kershaw pointed to data showing that contributions of exactly $300 increased 28% on December 31, 2020. It’s a sign the tax incentive was doing its job, Kershaw said. “But more needs to be done.” IRS statistics on the number of households accessing the tax break last year were not immediately available.
Charitable giving rules have changed for itemizers, too
Around 90% of taxpayers just take the standard deduction and skip itemizing, the IRS noted. High-end taxpayers are more likely to itemize their deductions, according to the Tax Policy Center.
Pandemic-era changes also affected charitable giving rules for itemizers. Previously, the charitable deduction for itemizers was “typically limited to 20% to 60% of their adjusted gross income,” the IRS noted. The variation depended on the type of contribution and the organization receiving it. But under the CARES Act of March 2020, lawmakers increased the deduction to 100% of a taxpayer’s adjusted gross income. Last December, they extended the deduction through 2021 in the same bill that broadened the rules on the above-the-line charitable deduction.
“The law now allows taxpayers to apply up to 100% of their AGI, for calendar-year 2021 qualified contributions,” the IRS said.
Nonprofits are struggling with labor shortages
Like many other employers coping with the current labor shortage, many charities are having a tough time finding and keeping staff.
One-third of nonprofits had job vacancy rates between 10% and 19% while one quarter said 20% to 29% of their positions were unfilled, according to new survey findings from the National Council of Nonprofits. Eight in 10 nonprofits said salary competition was one barrier preventing them from filling openings. Burnout and lack of childcare are other factors in their staff shortage, survey participants said.
That all boils down to less service for people in need, said David Thompson, vice president of public policy at the National Council of Nonprofits.
For example, one Montana safe haven for domestic violence victims is backed up by a month because it doesn’t have enough staff, Thompson said during the Monday press event. “Right now, front line nonprofits need donations of all sizes,” Thompson said.
“We are asking the public to help make sure our fellow residents get the services they need by using this temporary — we have 18 days left — this temporary non-itemized deduction to the fullest,” Thompson said.
People who want to take advantage of the charitable donation deduction should check to make sure they’re donating to a legitimate charity (the IRS has a tool where donors can do this), and save a copy of the receipt or gift acknowledgement. The IRS has more tips on using the charitable deduction here.
This story was updated on December 14.