Tax Benefits Help Donors Give to Charities in 2021. Deductions up to $600 available for “non-itemizers.”
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 was enacted to provide tax relief in the form of tax credits for eligible employers. It also provided several provisions to help individuals and businesses who give to charity. The new law extends through the end of 2021. Through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, four temporary changes were originally enacted and here are those changes.
1. Individuals who elect standardized deductions can deduct cash donations up to $600 for qualifying charities.
It is known that individuals who elect standardized deductions may not deduct charitable contributions. Ninety percent of taxpayers opt for standardized deductions and with the temporary changes can qualify for a limited deduction for cash contributions to charities. The IRS has stated, “[t]he law now permits these individuals to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations.” Specifically, individuals and married individuals, filing separate returns, can claim a deduction of $300 for cash contributions made to “qualifying charities” during 2021. The maximum $600 deductions is reserved for married couples filing joint returns.
What are qualifying charities? It may be easier to describe what is not a qualifying charity. Cash contributions to either a donor advised fund, private foundation, charitable remainder trust, or supporting organizations do not qualify as “qualifying charities” under temporary changes. See Publication 526, Charitable Contributions for more information on the types of organizations that qualify.
What are qualifying cash contributions? Qualifying cash contributions include checks, debit or credit cards, or unreimbursed out-of-pocket expenses in connection to volunteer service for a qualifying charitable organization. Cash contributions don’t include “value of volunteer service,” securities, household items or property. Cash contributions carried from previous years do not qualify as well.
2. 100% limit on eligible cash contributions on itemize deductions in 2021.
Contrary to standardized deductions, and certain limitations, individuals who itemize may claim deductions for contributions made to qualifying charitable organizations. Deductions can range from 20-60% of adjusted gross income (AGI) and vary by the type of contribution and charitable organization.
“The law now permits electing individuals to apply an increased limit ("Increased Individual Limit"), up to 100% of their AGI, for qualified contributions made during the calendar-year 2021.” Similarly, to individuals who chose standardized deductions what qualifies as qualifying charities and qualifying cash contributions are similar. See above.
For the new law to apply, the individuals who itemize must make an election for qualified contributions or their usual percentage limit would apply. Eligible individuals must make their elections with their 2021 Form 1040 or Form 1040-SR. Keep in mind that other allowed charitable deductions reduce the maximum amount allowed under this election.
3. Corporate deduction limit increased to 25% of taxable income.
Previously, the highest allowable deduction was limited to 10% of a corporate taxable income. “The law now permits C corporations to apply an increased limit (Increased Corporate Limit) of 25% of taxable income for charitable contributions of cash they make to eligible charities during calendar-year 2021.” Again, the Corporation does not automatically apply. Like itemized deductions, C corporations must elect the Increased Corporate Limit on a contribution-by-contribution basis.
4. Business can increase limits on amounts deductible for certain donated food inventory.
Business that donated food inventory that are eligible for the existing enhanced deduction (contributions to the ill, children, and the needy) can qualify for an increased deduction. For contributions made for 2021, the limit of those deductions increased from 15% to 25%. For C Corporations, the 25% deduction is based on their taxable income. For sole proprietorships, partnerships, S corporations and other businesses their limit is based on their aggregate net income for the year “from all trades or businesses from which the contributions are made.” As with food quality and other standards, methods apply to compute the enhanced deductions.
Records!
It is imperative for individuals and businesses to keep accurate records according to the special record keeping rules for charitable deductions. That process involves obtaining an acknowledgment letter form the charity as well as a receipt of sorts (cancelled check or any receipts) for cash contributions. Donations of property requires additional record keeping and may include filing a ‘Form 8283’ and acquiring a ‘qualified appraisal,’ if applicable.
For details on how to apply the percentage limits and a description of the recordkeeping rules for substantiating gifts to charity, see Publication 526, available on IRS.gov.