Name that Sector: Poised for Comeback After Two Tough Years

SMITH BRAIN TRUST – The year 2018 saw a pretty robust economy in the United States. But one sector slid about 1.7%, adjusted for inflation. Any guesses which one?

Maryland Smith’s Sam Handwerger offers a hint: That dip represented a significant blow to about 10% of the overall economy.

Still stumped? It’s a sector that sees about 30% of its revenue intake in the month of December. Gift giving, you’re thinking?

“Not quite,” says Handwerger, an accounting lecturer at the University of Maryland’s Robert H. Smith School of Business, and a practicing CPA. “It’s not those trips to the toy aisles at Target or the perfume counter at Macy’s. In fact, it’s not retail at all.”

It’s charities, the nonprofit sector of the U.S. economy. “That December rush, although obviously influenced somewhat by the gift-giving sentiment of the holiday season, is motivated in large part by the year-end tax planning opportunity it presents to American taxpayers,” says Handwerger.

And the reason why it’s changed could have a big impact on your tax return this year.

Prior to 2018, charitable gifting reduced income taxes for about 30% of all taxpayers. In 2018, this number was sliced to just 10%. That’s when the 2017 tax legislation, the TCJA, went into effect, increasing the standard deduction by 90%, thus reducing the number of taxpayers who itemize deductions. For taxpayers who itemize, those charity dollars could help reduce that tax liability, but for taxpayers who take the standard deduction those charity donations have no effect.

“And so, in 2018 with the tax incentive to give curtailed, so were the gifts,” Handwerger says.

Fast forward to 2020, year of the coronavirus pandemic. Donations for this year are expected to be down by 20% overall. And many expected the trend to continue into 2021.

As a result, the CARES Act 2020 put in motion two tax incentives to target the sector, Handwerger notes. And both of them beg for some year-end tax planning.

First, the CARES Act has permanently changed the tax formula that today’s students of accounting are most familiar with. There is now a charitable deduction allowed even for filers who do not itemize.

With a standard deduction for married couples of $24,800, accumulating itemized deductions above that amount had been rare and reduced the tax incentive to give.

However, now the first $300 a filer donates for 2020 results in a deduction, even without itemizing. “This formulaic change is something that the nonprofits have been begging for, and although it is finally here, $300 is hardly the stimulus that they would have liked to see. Still, it is something and all taxpayers should consider at least giving to this amount since the tax effect is not lost when taking the standard deduction,” Handwerger advises.

Second, the CARES Act looks to appeal to the more philanthropically inclined among us.

Normally, total charitable donations allowed as a deduction is limited to a percentage of your adjusted gross income, currently 60%. While that seems like a pretty generous amount, for 2020 only, the limit is 100%. “You could wipe out your 2020 tax liability to zero by giving generously, say, to the tune of your total 2020 income,” he says.

The change makes 2020 a year of “conscious tax planning,” Handwerger says.

For example, let’s say you have been thinking of making a major gift in the near future, but since the new standard deduction limits your tax savings on such gifts you have been delaying the donation, waiting to bunch your donations in one year in order to overcome the standard deduction hurdle.

“Now 2020 is an interesting year to consider this because it not only affords you no concern about the percentage of gross income limit, but it helps out the charitable world in a year when it is sorely needed,” Handwerger says. "Exactly what Congress had in mind with this tax change.”