The Internal Revenue Service recently explained how expanded tax benefits can help individuals and businesses donate to charity before the end of this year.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted last December, includes several provisions to help individuals and businesses who give to charity. The new law generally extends until the end of 2021 four temporary tax changes initially promulgated by the CARES law (Aid, Relief and Economic Security against Coronaviruses). Here is an overview of those changes.
Deduction for individuals who do not itemize; cash donations of up to $ 600 are eligible
Normally, people who choose to take advantage of the standard deduction cannot claim a deduction for their charitable donations. The law now allows these individuals to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charities. Almost nine in ten taxpayers now benefit from the standard deduction and could potentially claim a limited deduction for cash contributions.
These individuals, including married individuals who file separate returns, can claim a deduction of up to $ 300 for cash contributions made to qualifying charities in 2021. The maximum deduction is increased to $ 600 for individuals brides who file joint returns.
Cash contributions to most charities are eligible. However, cash contributions made either to supporting organizations or to establish or maintain a donor-advised fund are not eligible. Cash contributions carried forward from previous years are not eligible, nor are cash contributions to most private foundations and most cash contributions to charitable residual trusts. In general, a donor advised fund is a fund or account maintained by a charity in which a donor can, by virtue of being a donor, advise the fund on how to distribute or invest the monies donated. by the donor and held in the fund. A supporting organization is a charity that achieves its exempt purposes by supporting other exempt organizations, typically other public charities. See Publication 526, Charitable contributions for more information on the types of eligible organizations.
Cash contributions include those made by check, credit card or debit card as well as amounts incurred by an individual for unreimbursed expenses related to the individual’s volunteer services to an eligible charity. Cash contributions do not include the value of volunteer services, securities, household items or other property.
100% limit on eligible cash contributions from retailers in 2021
Subject to certain limits, people who retail can generally claim a deduction for charitable contributions made to qualifying charities. These limits typically range from 20% to 60% of Adjusted Gross Income (AGI) and vary depending on the type of contribution and the type of charity. For example, a cash contribution made by an individual to an eligible public charity is generally limited to 60% of the individual’s AGI. Excess contributions can be carried forward for up to five tax years.
The law now allows individuals to choose to apply an increased limit (“Increased Individual Limit”), up to 100% of their AGI, for eligible contributions made during the calendar year 2021. Eligible contributions are cash contributions made to eligible charities.
As with the new limited deduction for non-itemizers, cash contributions to most charities are eligible, but cash contributions made either to supporting organizations or to establish or maintain a donor-advised fund, do not are not. Cash contributions to private foundations and most cash contributions to charitable residual trusts are also not
Unless an individual elects for a particular qualifying cash contribution, the usual percentage limit applies. Keep in mind that other deductions allowed for an individual’s charitable donations reduce the maximum amount allowed under that election. Eligible persons must make their choices with their 2021 1040 form or 1040-SR form.
Company limit increased to 25% of taxable income
The law now allows C corporations to apply an increased limit (increased corporate limit) of 25% of taxable income for charitable cash contributions they make to qualifying charities in calendar year 2021 Normally, the maximum allowable deduction is limited to 10% of a corporation’s taxable income.
Again, the increased business limit does not automatically apply. C corporations must choose the increased corporate limit on a contribution-by-contribution basis.
Increase in the limits of the amounts deductible by companies for certain stocks of donated foodstuffs
Businesses that donate food stocks and are eligible for the existing enhanced deduction (for contributions for the care of the sick, the needy and infants) may be eligible for increased deduction limits. For contributions paid in 2021, the ceiling for these contribution deductions is raised from 15% to 25%. 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 total net income for the year from all trades or businesses from which contributions are made. A special method of calculating the increased deduction continues to apply, as do food quality standards and other requirements.
Keep good records
The IRS reminds individuals and businesses that special record keeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually this includes obtaining a receipt from the charity before completing a return and keeping a void check or credit card receipt for cash contributions. For gifts of property, additional record keeping rules apply and may include filing a Form 8283 and obtaining a qualified appraisal in some cases.