The case for bringing back the charitable deduction for 2023
With politicians stalled on passing a budget deal, many talks are arising during negotiations about tax extenders and potential changes for the 2023 tax year. This is easily one of the most frustrating parts of my job. I have to tell clients what to plan for, but congress doesn’t usually like to tell me what all the laws are until around Christmas time. This is done by way of tax-extenders.
Most tax legislation is not permanent. Instead, it sunsets after a certain amount of years. When this happens, congress will often negotiate on whether or not to extend some of the items when they are drafting their budget for the following year. Many of these items get finalized or put in place retroactively for the previous tax year, hence my frustration with tax extenders and their impact on my general well-being.
This year, it’s looking like there will be a handful of items on the table. However, one that appears to have some bipartisan support is the charitable deduction. If you don’t remember, this was a $300 above-the-line deduction that became available in 2020 as a part of the CARES Act. After that, the deduction was increased to $600 for 2021 for married couples. This was a really popular deduction, and here’s why.
How charitable contributions are deducted
After the Tax Cuts and Jobs Act passed in 2017, the standard deduction doubled for most taxpayers. Remember, you either take itemized deductions or the standard deduction (whichever is larger). Itemized deductions include mortgage interest, real estate taxes, medical expenses (not really though), and charitable contributions. If the total of these (subject to limitations) is more than your standard deduction, you take itemized deductions and all these line items matter. If the total is less than the standard deduction, none of it matters and you wasted time gathering the records.
An above-the-line deduction is something that’s calculated before your itemized deductions. It’s subtracted from your taxable income prior to itemizing and calculating your tax. In other words, it’s way easier to deduct. Ever since the Tax Cuts and Jobs Act passed, many charitable organizations have been struggling to get small and mid-sized donors because there is no income tax motivation for most people to donate. An above-the-line deduction would help that cause and give smaller donors motivation to donate.
This is something that seems like a no-brainer to me. It doesn’t cost a ton and it helps non-profit organizations achieve their goals and do good things so I can continue being selfish. If I were a betting man (I am), I would bet that this is one thing that passes prior to the end of 2023.