Do You Qualify for a $300 Tax Deduction Under the CARES Act?

We are all fighting against the financial ramifications of COVID-19 together. For many businesses and families, the coronavirus has halted a lot of financial progress, but there is a light at the end of the tunnel, and that light is the CARES Act. This $2 trillion economic stimulus package has sought to aid individuals and families alike as they navigate the aftermath of the pandemic.

But this aid package also introduced a new provision that could impact charities and non-profits. The CARES Act established a universal provision that allows you to deduct non-itemized, above-the-line charitable contributions.

Now, what does this mean, what is the contribution limit, and how will it impact you? Let’s find out.

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TCJA and how it affects charitable contributions

As a general rule of thumb, charitable contributions can only be a deduction if you itemize your personal deductions, instead of taking the standard deduction. If you don’t itemize, you’re out of luck — and the Tax Cuts and Jobs Act (TCJA) made this process a much more difficult feat.

TCJA went into effect in 2018 and nearly doubled the standard deduction, eliminated personal exemptions, and eliminated several itemized deductions. For 2020, the standard deduction is $12,400 for those filing single and $24,800 for those married filing jointly. This surge withheld most Americans from being able to itemize their deductions. Since TCJA, only 10% of taxpayers (opens in new tab) itemized deductions.

As a result of TCJA’s larger standard deduction, charitable contributions decreased in 2018 and 2019, leaving nonprofit organizations hurting.

What is this new universal deduction?

The CARES Act, among other coronavirus relief efforts, has instituted a provision allowing people to deduct $300 for charitable contributions. If you are married and filing jointly, your deduction is still limited to $300. Taxpayers can take this universal deduction no matter whether they itemize or take the standard deduction on their taxes.

Deductions under the CARES Act must be in cash (including checks and credit card payments) and given to a 501(c)(3) public charity. Contributions to non-operating private foundations, support organizations and donor-advised funds don’t fall under this new deduction. Because the CARES Act deduction is a universal above-the-line deduction, you can list your contribution as an adjustment to income on your taxes.

In short, with the CARES Act, if you donate up to $300 in cash to a qualified organization, your adjusted gross income will be reduced up to $300.

Another benefit of this provision is that you don’t need to include documentation when you file gifts $250 and under — just be sure to keep proof of cash receipts. All gifts exceeding $250 need to include the receipt or proper documentation when filing.

In the grand scheme of things, how helpful is this $300?

While a universal deduction is something charities and nonprofits have been seeking for many years, this provision is far from their ideal solution. Nonprofits would greatly benefit from deductions being in the thousands, so the $300 limit can be a bit disappointing.

Even though the limit is smaller than their ideal solution, it could help small to midsize nonprofits gain some useful traction. Especially now that COVID-19 has hurt so many financially, this provision could encourage more people to give, even in these trying times.

At the end of the day, $300 is better than nothing at all and this new provision could encourage Americans to research and donate to charities they might have never discovered.

Another tax benefit to the CARES Act

With the CARES Acts, for those who itemize deductions for 2020, you can deduct charitable contributions of up to 100% of your AGI (adjusted gross income). That’s up from the 60% that was allowed under TCJA. This means that for 2020 if your AGI is $250,000, you can deduct $250,000 in charitable contributions.

While the ultimate goal of the universal deduction is to help smaller organizations, this extension for deductions could be an additional incentive for wealthy donors to continue giving this year.

The CARES Act has also increased the amounts of annual charitable deductions for corporations from 10% of taxable income to 25%. Any donations that are greater than 25% can be deducted within the following five years.

Is the CARES Act the greatest invention since sliced bread? Probably not — but during these incredibly unpredictable times, every little bit helps charities and nonprofit organizations.

As with all tax topics, please consult with your accountant or a tax professional, and make sure the strategy makes sense for you. Happy gifting!