William Stromsem, CPA, J.D.
George Washington University School of Business
In a year of hard times from hurricanes and COVID-19, and also in a year of a rising stock market and commodity prices, some clients may be inclined to be even more charitable in 2021 and there are four temporary tax opportunities that end after this year.
With the increased standard deduction and limits on itemized deductions, charities received 4% less in the year after the Tax Cuts and Jobs Act of 2017 (TCJA). Those using the standard deduction rose from around 70% before the TCJA to 90% after the act and taxpayers who took the standard deduction received no added tax benefit from their contributions. In 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act provided some temporary tax changes intended to encourage charitable contributions and these were extended through 2021 by the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
Here are four added incentives to increase charitable contributions this year:
Above-the-Line Deduction of $300 Single/$600 MFJ
Taxpayers who take the standard deduction can also take a deduction towards adjusted gross income (AGI) of up to $300 for singles and $600 for married filing jointly for cash contributions to most charities. The donation must be in cash, so no securities, no used clothing or household goods, and no volunteer services, although unreimbursed out-of-pocket expenses of a charity volunteer can be taken above the line.
Most charities qualify, although there are some restrictions. Two that will not qualify are private foundations and charitable remainder trusts (where there is a non-charitable beneficiary for life and then a charitable organization receives any funds remaining when the trust terminates). Also not qualifying are “supporting organizations” (that support other charities rather than providing charitable benefits directly) and donor-advised funds (that allow the donor to advise the fund on how to manage and distribute funds contributed by the donor). Prior year charitable contribution carryforwards do not qualify for above-the-line deduction.
No AGI Limit for Cash Contributions in 2021
The 60% of AGI limit on deductions to qualified charities is suspended for 2021, meaning that a very charitable person could eliminate his/her income tax liability with contributions equal to AGI. Like the non-itemizer deduction above, cash contributions to most charitable organizations qualify, but contributions to supporting organizations, donor-advised funds, private foundations and charitable remainder trusts do not. The donor must elect the “increased individual limit” on the tax return. The election applies after considering other contributions that are subject to the remaining percentage limitations.
Corporate Charitable Contribution Limit Raised
The normal limit on C corporation charitable contributions is 10% of taxable income, but for 2021 it is 25%. This “increased corporate limit” must be separately elected for each contribution claimed on Form 1120.
Food Donations Limits Raised for Businesses
Grocery store or other retailers that donate food inventory to a qualified charity to care for the elderly, infants, needy or individuals who are sick can qualify for a higher charitable contribution. The percentage of income is increased from 15% to 25%. This percentage is based on taxable income for C corporations and on aggregate net income for sole proprietorships, partnerships and S corporations. There are some details on the calculation in the instructions, but generally the deduction is limited to full cost plus half the normal profit margin. In a time when the need for charitable outreach is heightened and some people are going hungry, it just makes sense for others who have excess food to donate it (and get a tax benefit). Food safety and quality standards apply.
These above items are available only for this year, but there are many other strategies for charitable contributions that continue, including:
- Donating long-term appreciated capital assets, like investments in stocks, bonds or real estate, and deducting their full fair market value without having to pay tax on the gain. This strategy is limited to 30% of AGI.
- “Bunching” deductions in alternate years to be able to itemize one year and take the standard deduction in the next. Charitable contributions are ideal for this timing strategy to generate extra deductions over a two-year period if your itemized deductions are otherwise just under the standard deduction amount.
- Making charitable contributions directly from an IRA (or SEP or SIMPLE IRA) to a qualified charity to satisfy the annual required minimum distribution without having to pay tax on the distribution. This allows donors to make a larger contribution than if the distribution were taxed and then the net contributed to the charity.
Beyond the tax benefits of charitable giving, there is also the great feeling of helping others get through this year of hard times resulting from the pandemic and natural disasters.