Charitable Deductions for Non-Itemizers
Recent changes in the tax regulations to help ease the burdens of the pandemic could lead to lower tax bills at filing time for some Americans. The new benefits allow taxpayers who do not itemize to take advantage of donations to charity—at least for a while.
The change was part of last December’s Taxpayer Certainty and Disaster Tax Relief Act of 2020, which allowed deductions for charitable gifts using a number of methods.
Non-itemizers can cash in, for now
The new law extends four relief measures originally set out by other coronavirus relief legislation through the end of 2022.
Historically, taxpayers had to itemize their deductions in order to claim charitable contributions. The new law, however, means taxpayers who don’t qualify for itemizing can claim a deduction for cash contributions on their 2021 return.
The IRS estimates that nine in 10 taxpayers take the standard deduction but could potentially benefit from the expanded charitable deduction.
The deduction is not unlimited; instead, individual non-itemizers are limited to a $300 deduction and married couples top out at $600 if filing jointly.
Donations of cash to most charitable organizations qualify for the deduction. However, an IRS release makes it clear that there are certain instances where the deduction won’t be allowed:
“Cash contributions made either 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 most cash contributions to charitable remainder trusts,” an IRS release states.
“In general, a donor-advised fund is a fund or account maintained by a charity in which a donor can, because of being a donor, advise the fund on how to distribute or invest amounts contributed by the donor and held in the fund. A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities.”
Publication 526, Charitable Contributions, has more information on the various types of qualified organizations.
What kind of donations qualify for the deduction? Good old-fashioned cash, of course, but there are other methods that qualify as well: contributions by check, credit or debit card all qualify. Those taxpayers donating their time to a qualified charity also get a break, since they can deduct unreimbursed out-of-pocket expenses they incur as part of their volunteer work.
Not included in the deduction are the value of volunteer service itself, securities, household items or other property. In other words, non-cash donations of household goods don’t qualify for the deduction.
Deduction expanded for itemizers too
Before the expanded deduction took effect, those taxpayers who elected to itemize had limits on how much in donations they could claim. Usually, itemizing taxpayers could claim anywhere from 20% to 60% of their adjusted gross income (AGI) for the purposes of a deduction, depending on the kind of contribution.
Cash donations from an individual taxpayer to a qualified public charity are usually capped at 60% of the taxpayer’s AGI. Excess contributions can be carried forward up to five years.
The new law, however, expands their limits. A new cap—called an “Increased Individual Limit” by the IRS—is used for eligible contributions, topping out at 100% of AGI on qualified donations made during the 2021 calendar year.
The rules for those who itemize, what is permitted as a qualified charity or a qualified donation- and what isn’t—is the same as for those who don’t itemize.
The IRS reminds that taxpayers have to make an election for any given qualified cash contribution. Otherwise the usual percentage limit will apply.
It’s also helpful to remember that a taxpayer’s other allowed charitable contribution deductions will reduce the maximum amount allowed through this election.
Use the 2021 Form 1040 or the Form 1040-SR to make the election for these deductions.
Corporate limit increased
Businesses also got higher limits for their qualified donations to charities in the new law. C corporations can apply their Increased Corporate Limit of 25% of taxable income to their charitable contributions of cash during the 2021 calendar year. That’s up from the usual limit of 10%. Like individuals, corporations have to elect to choose the Increased Corporate Limit, and they have to make that choice on a contribution-by-contribution basis.
Some businesses make their contributions not with cash, but with food, donating food inventory to help feed the ill, the needy and infants. These donations are also covered by the new law for calendar 2021, and the deduction for qualified food donations is raised from 15% to 25%.
The 25% limit for C corporations is based on their taxable income, while other businesses such as sole proprietorships, partnerships and S corporations, have a limit based on aggregate net income for the year from all activities of the business that generated the contributions.
Good records make it possible
A taxpayer, whether an individual or a corporation, can collect their deduction for a cash donation to a charitable organization only if they can show proof that the deduction was actually made.
This usually means keeping a cancelled check or a credit card receipt for the cash contribution, and getting a letter from the charity organization acknowledging the donation.
Additional bookkeeping rules apply for donations of property. Filing a Form 8283 may be necessary, as well as getting a qualified appraisal, depending on the donation.
See Publication 526 for more information on how to apply the percentage limits and bookkeeping rules for documenting gifts to charity. Go to IRS.gov/coronavirus for more information about other pandemic-related tax relief measures.