In an effort to incentivize charitable giving during the pandemic, the CARES Act and Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) of 2020 put in place temporary and favorable charitable deduction changes.
For 2020, the TCDTRA allowed a charitable deduction of up to $300 for taxpayers who did not use itemized deductions, regardless of filing status. For 2021, the charitable contribution deduction is enhanced to allow single taxpayers to deduct up to $300 while married filing joint taxpayers are allowed a deduction up to $600 if they do not use itemized deduction.
In previous years, taxpayers who used itemized deductions were limited to a charitable deduction of typically 20% to 60% of their adjusted gross income (AGI). This deduction varied based on the type of contribution and the type of charitable organization. Cash contributions were limited to 60% of the individual’s AGI and the excess contributions were allowed to be carried forward for up to five tax years.
For 2021, taxpayers who use itemized deductions are now allowed to deduct up to 100% of their AGI for qualified cash contributions to qualifying charitable organizations. An election must be made to receive the 100% limit for any 2021 qualified cash contribution.
Cash contributions to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations are limited to 30 % of adjusted gross income as previously.
Contributions of non-cash property may still be claimed as a deduction. However, they are subject to a 30 % adjusted gross income limitation.
Changes have also been made to corporate charitable contribution deductions. For the 2021 tax year, “C” Corporations are now allowed to apply an increased corporate limit of 25% of taxable income for charitable cash contributions made to eligible charities (increased from 10% of taxable income pre-CARES Act). An election must be made by the “C” Corporation to enact this increased limit for each contribution.
Businesses that donate food may also receive increased deduction limits in 2021. The 2021 limit is increased for “C” Corporations to 25% of their taxable income (increased from 15% of the taxpayer’s aggregate net income or taxable income). For other businesses, including sole proprietorships, partnerships, and “S” corporations, the limit is based on the individual partner or shareholder’s total net income for the year. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.
Additional Tax Planning Using Charitable Contributions
Due to the high stock market values, taxpayers may find it beneficial to donate appreciated securities. Taxpayers can donate securities held for more than one year, allowing the taxpayer to make a charitable contribution using appreciated stock and receive a deduction for the fair market value of the security without having to realize the gain on the stock as taxable. The deduction for contributions of appreciated securities is limited to 30% of the donor’s adjusted gross income (AGI). Donations of appreciated stock made to private foundations are limited to 20% of the donor’s AGI. If the value of the donation exceeds the AGI limits, there is a five year carryforward for the excess donation.
It is important to note that the IRS classifies cryptocurrencies as property, so donations of cryptocurrency to 501(c)(3) charities receive the same tax treatment as do publicly-traded stocks.
