Published on 04/01/2021

We have officially entered 2021 and the much-dreaded 2020 is finally behind us. For a lot of people in the country, 2020 was the year of grief. People lost their loved ones, several people were furloughed and many still don’t know where they will get the next meal from. But now that we have moved into a new year with mass inoculation campaigns beginning in the U.S and across the world, there is a glimmer of hope.

The economy is restarting and while business may not be back to usual, it is picking up. And for a lot of others, this is the time to buckle up and plan in terms of their tax strategies for the upcoming financial year.

Charitable Donations are a great option for Americans these days to spread the holiday cheer and feel better about having done some good for society. Another cherry on the cake is the fact that donating Money to charities can help you claim hefty deductions while filing your taxes. So you end up helping those worst affected and those in need, and also save some money on your taxes!

But there’s a catch.

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act was passed in 2017 and has deterred people from donating money to charities. The new Act passed under the Trump Administration has reduced the financial advantage it gave to those donating money to verified charitable organizations.

It has also been found that after the Act was passed, taxpayers have shown reluctance to itemize their tax returns for deductions. More people are now opting to go for the standard deductions which gives almost the same financial advantage in terms of money saved with much less hassle. People choosing to itemize their tax returns have dropped by more than 50% in 2018 than the year before that.

Therefore, it has now become a battle of wanting to donate- even if it means not getting any tax rebate for the act of Charitable Donations.

However, there is a way to make sure that you get some tax benefits while donating money to charitable causes.

CARES Act 

As per the new tax laws, more and more people are opting for standard deduction while doing their taxes. It is much easier than itemizing your tax returns and provides similar benefits. Surprisingly, donating money for charity does not make much of a difference when you opt for standard deductions when filing your taxes.

When the CARES Act was passed in March 2020, more emphasis was put on people who would like to donate to charities and gain a tax benefit given that a global pandemic had affected us economically. Hence, a provision was made in the CARES Act to let tax-paying citizens opt for standard deductions AND be able to get a tax benefit of up to $300 for it as well when they donate money to charitable organizations.

This clause was added after it was noticed that charitable organizations across the country demanded aid in difficult times as the pandemic. To lure more donations and encourage people to donate more, the IRS let people claim a tax deduction for the money donated.

There was another catch here.

The donations made should only be in cash. Donations in kind, service, property, or via other mediums would not amount to getting a tax rebate.

Bunching strategy

The exemption of up to $300 can seem like a very small amount.

However, Americans could use a tax strategy called ‘bunching’ when making charitable donations. All you have to do is make a few years’ worths of charitable donations in a single year rather than making annual donations.

You could use a donor fund as a tax vehicle for this. You can put all the money to be donated in that particular donor fund to be paid as donations in the years to come. All this while you would have already reaped the benefits of tax rebates.

Bunching is a strategy that works best for people who want to donate large amounts of money. It is here that the taxpayer can itemize their tax returns and claim humongous tax exemptions against it.

The pandemic has already been hard. The bottom line is the fact that you might not save a lot of money and gain whopping tax benefits. But since the year has been so hard on a few people, the simple act of sparing a few dollars should not be much of an issue- if you get a deduction or not.

And if you do get a tax exemption, it is money spent well.

Tax planning can be difficult with so many new tax laws and provisions. You can contact our financial advisors at [email protected] for more information on how to save on taxes this year.