A Hidden Trap in Charitable Deduction for Nonitemizers?

The IRS has just reminded nonitemizers that they may be able to claim a special deduction for charitable contributions in 2020 (IR-2020-264, 11/25/20). But it failed to mention that married couples filing jointly may be penalized.

Here’s the scoop: Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, designed to provide financial relief from the COVID-19 pandemic, a taxpayer who chooses to not itemize deductions can claim a charitable deduction of up to $300 for monetary donations made in 2020. Normally, charitable deductions are only available to itemizers.

The $300 deduction, which is sometimes referred to as the “universal deduction,” is claimed above the line, so it reduces adjusted gross income (AGI) for other purposes. Donors must meet the usual substantiation requirements.

This includes monetary donations paid with cash, check, credit card, electronic fund transfer, payroll deduction, etc. But you can’t count contributions of property or those made in exchange for goods or services. In addition, the deduction can’t be claimed for contributions made to non-operating private foundations, support organizations or donor advised funds.

Sticking point: The $300 maximum applies to each filing unit. For example, if a married couple files a joint tax return without itemizing and each spouse contributes $300 in cash to charity in 2020, their deduction is limited to $300. It’s yet another example of the “marriage penalty” for joint filers. However, when a couple is married and filing separately, each one can deduct up to $300 for a total of $600 if they take the standard deduction.

Finally, be aware that the deduction can’t be claimed for amounts carried over from prior years. So, if a single filer will be carrying over $100 for a 2019 return where he or she itemized, the excess can’t be allocated to the 2020 universal deduction. In the same vein, you can’t carry over any excess above the $300 maximum for 2020 to 2021.

Of course, a new Congress could extend the universal deduction, but there are no guarantees. Encourage clients who don’t expect to itemize in 2020 to seize this tax-saving opportunity within the limits described above.