Some donors may get a smaller than expected tax deduction for 2021 charitable gifts

Expecting an enhanced write-off for charitable gifts in 2021? The deduction won’t look the same as it did in 2020, according to tax experts. 

As the pandemic ravaged American lives, Congress added a provision to the CARES Act to spark more charitable giving: an improved tax deduction for cash gifts up to $300 in 2020. 

In 2020, single or joint filers could claim a $300 “above-the-line” write-off on their tax returns, meaning they received the benefit whether they itemized deductions or not.

When lawmakers extended the benefit for 2021, they boosted the deduction to $600 for couples filing together, and many expected the tax break to work the same way as 2020.

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However, tax experts recently noticed a change. The charitable write-off is no longer above-the-line, but it’s not an itemized deduction, either. That’s according to the 2021 draft of the form taxpayers use to file their returns.

“It’s a deduction that does not impact [adjusted gross income],” said certified financial planner and CPA Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in St. Louis. “But you don’t have to itemize in order to claim it.”

The above-the-line charitable deduction for 2020 may have reduced someone’s adjusted gross income, with other possible consequences, such as lowering their taxes on Social Security payments or reducing Medicare Part B premiums, Levine said.

However, the 2021 write-off won’t impact adjusted gross income and could negatively affect a single taxpayer who benefited from the reduced income in 2020, Levine said.

“For single filers, this is not a win,” Levine said. “At best, they’re in the same position, but they can’t possibly be better off than they were last year.”

Still, while the IRS ties adjusted gross income to everything from child tax credits to income-driven student loan payments, the 2021 changes may be a wash for someone in the middle of the income thresholds.

However, married taxpayers who file together may be better or worse off, Levine said.

“For most people [who are married filing jointly], I suspect this will be better,” he said. “But there are certainly going to be those edge cases where this is absolutely harmful.”

For example, a couple on the edge of income thresholds may get bumped into paying higher Medicare Part B premiums for 2023. (Medicare Part B bases premiums on modified adjusted gross income from two years prior.)

While the deduction may be less beneficial for certain taxpayers, Levine doesn’t expect the change to affect charitable giving through 2021.

Historically, taxpayers have seen two types of deductions: above-the-line, affecting adjusted gross income, or below-the-line, which filers must itemize to claim. 

But the charitable deduction for 2021 falls into a third “in-between” category, Levine said.

Another recent example is the tax break for qualified business income, a write-off for certain pass-through businesses added by the Tax Cut and Jobs Act of 2017.  

“It really is begging the question: Is this now a new thing for our legislators?” Levine said.