Expanded tax benefits for charitable contributions expire at the end of 2021, so it is important to consider additional giving now. Both the CAREs Act and the later Taxpayer Certainty and Disaster Tax Relief Act of 2020 put in place temporary, more favorable charitable deduction rules, including:
- An increase in the AGI limitation on charitable deductions by individuals who itemize.
- Charitable deduction for non-itemizers of $300 for singles and $600 for joint filers.
- Increased corporate charitable deductions of 25% of taxable income.
- Increased corporate deductions for contributions of food inventory.
Only cash contributions qualify. Contributions of non-cash property do not qualify for these higher limits. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.
Below is an explanation of the enhanced tax benefits for charitable contributions made before the end of 2021.
100% AGI Limit on Cash Contributions Made by Itemizers
Individuals who itemize may claim a deduction for charitable contributions made to qualifying charitable organizations, subject to limits. These limits typically range from 20% to 60% of adjusted gross income (AGI) and vary by the type of contribution and type of charity. Under pre-CAREs Act rules, a cash contribution to a public charity was limited to 60% of the individual’s AGI. Contributions in excess of these limits may be carried forward for up to five tax years.
A temporary rule allows individuals to apply an increased limit of up to 100% of their AGI for cash contributions made during the calendar year 2021. Qualified contributions do not include contributions to supporting organizations or to establish or maintain a donor-advised fund, contributions to private foundations, and most donations to charitable remainder trusts.
A donor-advised fund is a fund or account maintained by a charity in which a donor can advise the fund on how to distribute or invest the donor’s contributions. A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities.
For the increased itemized deduction, individuals must elect the higher limit with their 2021 Form 1040 or Form 1040-SR.
Deduction for Non-Itemizers
Usually, individuals who take the standard deduction cannot deduct charitable contributions. The temporary COVID relief laws permit these individuals to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to charitable organizations. The deduction is limited to $300 for single taxpayers and $600 for married taxpayers filing joint returns.
Like the increased deduction for itemizers, contributions to supporting organizations or to establish or maintain a donor-advised fund do not qualify. Cash contributions carried forward from prior years do not qualify, nor do cash contributions to most private foundations and charitable remainder trusts.
According to the IRS, nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify to claim the limited deduction for cash contributions by non-itemizers.
Cash Contributions, Defined: Cash contributions include those made by check, credit card or debit card as well as amounts incurred by an individual for unreimbursed, out-of-pocket expenses in connection with the individual’s volunteer services to a charitable organization. Cash contributions do not include the value of volunteer services, securities, household items or other property.
Corporate Limit Increased to 25% of Taxable Income
The regular corporate charitable deduction limit is 10% of taxable income, but the COVID relief bills raised this limit to 25% of taxable income through 2021 for cash contributions to eligible charities. The increased deduction does not automatically apply. C corporations must elect the increased limit on a contribution-by-contribution basis.
Increased Limits for Donated Food Inventory
Businesses that contribute food inventory for the care of the “ill, needy or infants” get an enhanced deduction in 2021. The previous deduction limit was 15% of the taxpayer’s aggregate net income or taxable income. For 2021, business taxpayers may deduct contributions of up to 25% of their aggregate net income or taxable income.
For C corporations, the 25% limit is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their aggregate net income for the year from the businesses from which the contributions are made.
Act Quickly and Keep Good Records
Special recordkeeping rules apply to taxpayers claiming charitable contribution deductions, depending on the amount and type of donation. Taxpayers may need to get an acknowledgment letter from the charity before filing a return. Also, taxpayers should keep canceled checks and credit card receipts for any donations and should note the date of the contribution and the full name of the charity.
The window for enhanced deductions is closing within the next couple of months, so make sure you complete your 2021 donations by the end of the year to take advantage of the expiring rules.