What You Need to Know
- Many advisors and tax planners missed this change when the CARES Act provision was extended, Jeffrey Levine says.
- This is bad news for single filers, but the change stands to be good for some joint filers and bad for others.
- This will likely be a moot issue for 2022 because, as of now, the deduction has not been extended again.
When the charitable deduction that was included in the 2020 Coronavirus Aid, Relief and Economic Security (CARES) Act for filers not itemizing their tax returns was extended for 2021, there was one major addition: a $600 charitable deduction for joint filers in addition to the $300 deduction for single and joint filers from last year.
However, it turns out there’s one more big difference in the deduction’s implementation for 2021 that many tax experts didn’t initially realize.
That additional difference? For this year, it’s the equivalent of a below-the-line deduction instead of the above-the-line deduction it was in 2020, according to Jeffrey Levine, Buckingham Wealth Partners director of advanced planning and Kitces.com director of advisor education, and Roger Pine, co-founder of Holistiplan, a fintech firm that helps financial planners with tax planning using automation.
Like other tax experts who read through the Taxpayer Certainty and Disaster Tax Relief Act of 2020 when it was introduced late last year, Levine and Pine said they initially believed the deduction was being extended into 2021 with no big changes aside from the $600 deduction for joint filers.
Revisiting the Charitable Deduction
In a recent YouTube video, Levine and Pine revisited the charity deduction after an advisor using the Holistiplan platform pointed out the 2021 deduction was really below the line and not above it. As it turned out, the advisor was correct.
As a result, “all those cool things that you get with respect to it being above the line last year — primarily the impact on Social Security taxation was the big one — that’s gone now,” along with any benefits related to adjusted gross income and modified AGI, according to Pine. “Everybody missed this,” he said.
Three hundred dollars or $600 is not going to move the needle that much for many clients, Levine noted in the video. But when it comes to taxes, paying less is always better, even if it’s just a small amount, and when an advisor shows a client he or she is taking advantage of a small deduction, it tends to provide the client with confidence the advisor will also be sure to take advantage of larger deductions, he said.
So why did they and other tax experts not catch the change? One main reason is “there’s 17,000 bills going back and forth,” Levine said with a laugh during a phone interview with ThinkAdvisor on Thursday. “That’s part of it — just the volume of information.”
What Advisors Need to Know
Aside from the need to possibly make a change in tax planning software to account for the change, the “biggest thing” advisors need to know about the change in the deduction for 2021 is that, “by not being an above-the-line deduction, it’s not going to lower” a client’s AGI as previously believed, Levine said.
This is significant because AGI is a “key metric for just about everything,” he said. “By virtue of the fact that you have it as not an above-the-line deduction, if you’re, let’s say, close on a Medicare surcharge, for instance, or you’re close to a phaseout or some other AGI-based number,” he explained, the $600 charitable gift deduction for joint filers or $300 for single filers is now “not going to reduce” the client’s AGI, he said.