Earlier this year, I wrote an article entitled Strategies to Make Your Charitable Giving Go Further that discussed some of the tax efficient ways to donate to your favorite charities. Included in the article were strategies that were only available for the 2020 and 2021 tax years, such as the charitable deduction for those who do not itemize. Despite what most experts believed—and what was included in my article—for the 2021 tax year, this charitable deduction is not an above-the-line deduction like it was for the 2020 tax year but is the equivalent of a below-the-line deduction. Read on to see what the difference could mean for you.

Background

The Coronavirus Relief Bill passed in December 2020 extended the CARES Act tax deduction of cash donations made to charities by individuals and families who do not itemize deductions on their tax returns. For the 2020 tax year both single and joint filers who claimed the standard deduction had the ability to deduct up to $300 in cash donations. For the 2021 tax year, single filers maintained the $300 deduction, but those married filing jointly could deduct up to $600 ($300 per filer). This was not the only change, however. Rather than the deduction being above-the-line like in 2020, for the 2021 tax filing year, it is the equivalent of a below-the-line deduction.

Why Does It Matter if the Charitable Tax Deduction is an Above-the-Line or Below-the-Line Deduction?

You will receive the same initial tax savings whether the charitable deduction is an above or below-the-line deduction. The tax savings is based on your marginal tax bracket. For example, individuals who fall in the 24% tax bracket will save $72 by fully taking advantage of the deduction. Those married, filing jointly in the 24% tax bracket will save $144.

The additional benefit to an above-the-line deduction is that you can lower your Adjusted Gross Income (AGI) by up to $300 or $600. Because so many tax benefits are dependent on your AGI, for those near a particular benefit cut-off, the loss of the $300 or $600 above the line deduction could make a substantial impact on your finances.

Common Examples

For those receiving Social Security with provisional income (adjusted gross income, tax-exempt interest, and half of their Social Security benefits) above $25,000 for single filers and $32,000 for those married filed jointly, their Social Security benefits go from not being taxed to being 50% taxable. For those above $34,000 and $44,000, respectively for single filers and those married filed jointly, 85% of their Social Security benefits are taxable. By lowering your adjusted gross income below these levels, you can save thousands of dollars in taxes.

For those age 65 and up who are on Medicare, modified adjusted gross income (MAGI) over different levels can affect the premiums they pay for Medicare Part B and D to the tune of thousands of dollars a year.

For a young family, they may miss out on stimulus payments like we have seen over the last couple of years, child tax credits, or the ability to fully contribute to tax advantaged retirement accounts or receive education tax credits if their AGI is above certain limits.

Closing Thoughts

Although the charitable deduction for those who do not itemize being below-the-line rather than above-the-line won’t affect most taxpayers, for those who rely on whatever means they can to lower their adjusted gross income to qualify for other tax benefits, factoring this into the equation will be important. For anyone who was banking on the charitable deduction to help them qualify for a particular tax benefit for the 2021 tax year, they should look at other options to decrease their adjusted gross income. These options could include maxing out contributions to traditional retirement accounts, making qualified charitable distributions from an IRA, holding off on taking capital gains, and moving income into next year or expenses into the current year for business owners, just to name a few.