After a weekend of holiday shopping, Americans will be shelling out for charity on Giving Tuesday, which produced $2.47 billion from U.S. donors in 2020.
But many don't realize there's a tax break for cash gifts in 2021, even if they don't itemize deductions on their federal return.
Introduced as part of the CARES Act of 2020, Congress provided charities a boost by offering an incentive for Americans to make cash gifts. Lawmakers extended the write-off for 2021.
Single taxpayers can claim a deduction for cash donations up to $300 and married couples filing together may get up to $600 in 2021, according to the IRS.
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"This is a unique opportunity to take advantage of a temporary tax benefit," said Juan Ros, certified financial planner at Forum Financial Management in Thousand Oaks, California.
With nearly 90% of filers using the standard deduction, it can be difficult for the average American to claim tax breaks for smaller charitable gifts since they must itemize to receive the benefit.
However, the temporary law allows those taking the standard deduction of $12,550 for single filers or $25,100 for married taxpayers to qualify in 2021.
"This means anyone can deduct a cash contribution to a qualifying charitable organization even if the taxpayer is unable to itemize deductions," said David Haas, a CFP and president of Cereus Financial Advisors in Franklin Lakes, New Jersey.
The cash gift, including payments by check, credit card or debit card, must go to a qualified charity. Transfers to a donor-advised fund or private foundation don't count.
Bigger tax breaks for itemizers
While the tax breaks up to $300 or $600 are a perk for many filers, those who itemize deductions may get a bigger write-off by gifting other types of assets.
For example, if someone has appreciated stocks or other investments held for more than one year in their taxable portfolio, they may consider transferring those assets to charity.
Here's why: The donation may avoid capital gains taxes of 0%, 15% or 20% for 2021, depending on income. To make it work, investors must give the assets directly to the organization rather than selling and donating the proceeds.
"This is an excellent opportunity for someone who has invested in an asset that has performed well and wants to diversify their holdings but doesn't want the capital gains hit," said Danielle Harrison, a CFP, fee-only financial planner and founder of Harrison Financial Planning in Columbia, Missouri.
Of course, there are many factors to consider, and a tax professional may provide guidance for the optimal strategy.