If you want to save a little money on your next tax bill while doing some good in 2021, time is running out.
Last December, a special tax deduction originally created to encourage donations at the start of the COVID-19 pandemic was extended for one more year.
As a result, taxpayers who do not itemize their tax deductions — meaning they claim the flat standard deduction instead — have a rare opportunity to claim a charitable deduction on their 2021 federal income tax return, the one that’s due by April 2022.
This deduction is worth up to $600 for married couples who file a joint federal tax return and up to $300 for other tax filers.
The IRS recently explained why this opportunity is unique:
“Ordinarily, individuals who elect to take the standard deduction cannot claim a deduction for their charitable contributions. The law now permits these individuals to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify to claim a limited deduction for cash contributions.”
How to claim the special charitable deduction for 2021
You can seize the special charitable deduction for 2021 by making a monetary donation to a qualifying charity by year’s end — Dec. 31, 2021.
Note that the words “monetary” and “qualifying” are key here.
Only monetary donations, which the IRS also refers to as cash contributions, count toward this particular deduction. These include donations made by check, credit card or debit card.
Non-monetary donations, such as clothing, are not deductible (unless you itemize your taxes).
For the purpose of a federal tax write-off, qualifying charities are defined as those that the IRS classifies as tax-exempt.
You can find out whether the IRS considers a particular charity tax-exempt by using the agency’s free online tool called the Tax Exempt Organization Search. The IRS recently released a tip sheet on how to use the tool.
How the special charitable deduction has changed since 2020
The charitable deduction that was available to non-itemizing taxpayers for 2020 was created by a different federal law than the law that extended this deduction for 2021. And there are a couple of key differences in how Congress wrote the two laws.
First, the good news, which applies to married couples filing jointly: For them, the special charitable deduction is worth more in 2021 (up to $600) than it was the prior year (up to $300). (For other taxpayers, the maximum value of the deduction is technically the same for both years — $300.)
The bad news applies to anyone who wishes to claim the special charitable deduction in 2021: It’s now what’s often called a “below-the-line” deduction, whereas it was an “above-the-line” deduction in 2020.
Above-the-line deductions literally are located above the adjusted gross income (AGI) line on federal tax returns. As a result, they can lower both your taxable income and your AGI. On the other hand, below-the-line deductions only lower your taxable income.
Your AGI is used to determine various aspects of your federal taxes, such as whether you are eligible for certain tax credits and whether you owe taxes on your Social Security benefits. So, generally, tax deductions that lower AGI as well as taxable income are considered more valuable than deductions that only lower taxable income.