Taxes: What Americans should consider when seeking charitable giving breaks

Rutgers School of Business professor Jay Soled joins Yahoo Finance to explain how Americans can reap tax benefits from charitable giving.

Video transcript

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ALEXIS CHRISTOFOROUS: Tax reform could impact financial planning next year, but there is still time this year to take advantage of the current climate and save on your tax bill. Who doesn't want to do that, right? Joining us now to talk about it is Professor Jay Soled of Rutgers School of Business. Professor Soled, thanks so much for being with us. So what should people be thinking about here where there are a few weeks left in the year in terms of charitable giving and gifting so they can optimize those donations?

JAY SOLED: Well, if they want to make charitable gifts they have another three weeks to do so. And this year there is an opportunity under the CARES Act to give up to $600, even if they don't itemize. So they should get their checks out soon. And also, in terms of gift-giving, you have the opportunity to give up to $15,000 without filing a gift tax return. So, once again, if they want to avail themselves of that opportunity, December 31 is a drop-dead date. They should take care of that ASAP.

- And what happens if the charitable contributions that you make are more than the standard deductions, whether you're a married couple or an individual?

JAY SOLED: OK, if they make charit-- keep in mind that most taxpayers now do not itemize. In fact, last year only a mere 11% of taxpayers itemized. So that being the case, you can always secure a charitable deduction on your Schedule A if you itemize. So for-- as a practical matter, very few taxpayers can take advantage of the charitable deduction in 2021 and going forward because the standard deduction is so large and 89% of the population does not take itemized deductions.

ALEXIS CHRISTOFOROUS: Do you think, professor, that the potential tax reform that's inside the Biden's Build Back Better plan, if it passes, can materially change what we're talking about here for 2022?

JAY SOLED: Well, let's put it this way. Some people think that some of the tax reform attributes of the Build Back Better Act may be retroactive to the beginning of 2021. Given that it's taken so long for this to go through the House and Senate and it may not even pass, right now there is clearly no way it's going to be retroactive. So I just want to-- for your listeners-- to make sure they understand there is going to be no-- in my opinion, there's going to be no retroactivity to the Build Back Better.

Having said that, in 2022, at least tentatively in the House bill, there's nothing that would change the nature of charitable giving or annual gift-giving. So for all intents and purposes, steady as it goes, it's going to stay on an even keel.

- And then, sir, how does the tax bracket you're in impact the deductions for charitable giving?

JAY SOLED: Well, taxpayers who are in higher tax brackets-- right now, the highest income tax rate is 37% and it's a graduated tax rate, so some taxpayers to pay 10%, 15%, 20%, up to 37%. So the larger-- or the higher your tax bracket, the bigger bang you get for your buck if you give charitably. So those taxpayers who give, say, $100,000 are going to save $37,000 in taxes. By contrast, those taxpayers who are, say, in the 10% tax bracket would give away $100,000 are going to save $10,000 in taxes. So it behooves higher income taxpayers to make larger charitable gifts relative to their counterparts who are in lower tax brackets.

- How have you seen, professor-- I don't know if you're tracking any of this, but since, you know, tax is, sort of, your specialty, have you seen individual and family philanthropy-- the way people are giving-- change during this pandemic? And, if so, how?

JAY SOLED: Well, what I've seen is that the number of people giving has decreased markedly? Why? Because there are so few itemizers out there that the trend is away from people giving, at least at the lower income tax brackets-- about giving significant gifts because they're not getting any bang for their buck. They're not getting a charitable deduction. They're taking the charit-- they're taking the standard deduction rather than itemizing their deductions, so they're not seeing any mitigation of their tax burden.

- And I want to ask you, sir, if you do write a charitable check, what does the timing of that need to be? Does it have to be before the end of December for it to be counted for the '21 year or what's the timing on that?

JAY SOLED: Well, as long as they make or get to a mailbox by December 31. Even if the check doesn't arrive to the charity until the first or second week of January, it's immaterial. So if the United Way, by way of example, is the recipient of your charitable donation and it doesn't receive it, say, until January 7, but you mailed it by December 31, you are entitled to a charitable deduction. And by the same token, if you use your credit card and you go online to make a charitable deduction or charitable contribution and you make that gift, again-- once again December 31-- even though you don't pay your credit card bill until sometime in January, or February, or March, or whenever you may pay it, you still secure a charitable deduction in 2021.

ALEXIS CHRISTOFOROUS: All right, Professor Jay Soled of the Rutgers School of Business. Thanks for being with--