As a means to stimulate charitable contributions during the COVID crisis, Congress made two notable changes for 2020—one allowing taxpayers that don’t itemize their deductions an above-the-line deduction for cash contributions of up to $300 and another for those itemizing their deductions to increase the maximum deduction for cash contributions to 100% of their adjusted gross income (AGI).
The recent COVID-related tax relief act, passed late in December, extends and enhances those liberalized charitable contribution deduction provisions. Here is a rundown on these charitable contribution tax benefits for 2021:
- Charitable Contributions for Non-Itemizers – The Taxpayer Certainty and Disaster Tax Relief Act allows those who don’t itemize their deductions a deduction of up to $300 for cash contributions made during 2021. Married couples filing jointly are allowed a deduction of up to $600 for the cash contributions they make during 2021. This is an increase from 2020, when the contribution was limited to $300 regardless of filing status. However, contributions by non-itemizers to new or existing donor-advised funds or private foundations don’t qualify for either year.
For 2021, the $300 or $600 amount is an add-on to a non-itemizer’s standard deduction. Claiming the deduction as part of the standard deduction for 2021 may not be quite as beneficial tax-wise for some taxpayers as was the deduction for 2020. This is because on 2020 returns the cash contributions, up to $300, are deducted in computing adjusted gross income, while on 2021 returns, the deduction will be taken after the AGI is figured. This distinction matters because many credits and other tax benefits are limited by the AGI amount.
Apparently, Congress anticipates that non-itemizers will abuse this new deduction by taking the deduction without actually making a contribution. In a preemptive attempt to head off such behavior, Congress also increased the accuracy-related tax penalty from 20% to 50% on an underpayment of tax resulting when a non-itemizing taxpayer improperly claims the charitable contribution deduction.
- Cash Contributions for Itemizers – Under the CARES Act that was enacted in March 2020, the 60% deduction limit on cash contributions to most charities was suspended for 2020, thus allowing larger cash contributions during the COVID crisis—potentially up to 100% of the AGI. Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the suspension of the 60% limit has been extended to 2021.
Cash contributions include those paid by cash, check, electronic funds transfer or credit card. Taxpayers cannot deduct a cash contribution, regardless of the amount, unless they can document the contribution in one of the following ways:
- A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include:
a. A canceled check,
b. A bank or credit union statement or
c. A credit card statement.
- A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization and the date and amount of the contribution.
- Payroll deduction records that include a pay stub showing the contribution and a pledge card showing the name of the charitable organization. If the employer withheld $250 or more from a single paycheck, the pledge card or other document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction.
To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization that includes the following details:
- The amount of cash contributed;
- Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution and a description and good-faith estimate of the value of any goods or services that were provided (other than intangible religious benefits); and
- A statement that the only benefit received was an intangible religious benefit, if that was the case.
Thus, for example, money dropped in a Christmas Kettle or tacked onto your purchase at a retail store would not be deductible because there is no documentation that the contribution was made.
If you have questions related to how charitable contributions might affect your tax return or how to document charitable contributions of any type, please call our office.