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Charitable Contributions: Tax Breaks and Limits

Gifts to charity are one of the best tax-saving opportunities available. Not only does the charity benefit, but taxpayers enjoy tax savings by deducting part or all of their contributions on their tax returns.

For 2021, special rules extend and expand the generous tax treatment for qualifying cash contributions previously allowed nonitemizers in 2020. Nonitemizers can deduct up to $300 in the case of single taxpayers and married persons filing separately—and up to $600 for married couples filing joint returns—for cash contributions made to qualifying charities in 2021. For 2021, itemizers are allowed to claim charitable contribution deductions for cash contributions up to 100% of their adjusted gross income (AGI). These tax benefits will not apply after 2021 unless Congress amends the law.

Here’s an outline of the rules for deducting charitable contributions, including the more generous allowances for 2021.   

Key Takeaways

  • The charitable contributions deduction allows itemizers to deduct contributions of cash and property to charitable organizations, subject to certain limitations.
  • For a charitable contribution to be deductible, the recipient charity must be a qualified organization under the tax law.
  • Annual AGI caps limit the total amount of charitable contribution deductions,
  • Special rules limit certain deductions based on the type of property donated and the type of tax-exempt organization receiving the donation.
  • Taxpayers who do not itemize deductions may deduct up to $300 of cash contributions on single returns—and $600, if married filing joint returns—in addition to claiming the standard deduction.
  • For 2021, the usual AGI ceilings on charitable contributions are revised to allow taxpayers deductions up to 100% of AGI for cash contributions made to qualified charities. 

The Basics of the Charitable Contribution Deduction

The tax treatment of a charitable contribution varies according to the type of contributed asset and the tax-exempt status of the recipient organization. Rules differ for individual, business, and corporate donors. Also, the amount of the deduction is subject to standards and ceilings.

Not All Donations Qualify for Deductions

The tax law imposes donee requirements designed to ensure that deductions are allowed only for contributions that serve a charitable purpose. A recipient organization must qualify for tax-exempt status as required by the tax code and determined by the Internal Revenue Service (IRS).

The list of eligible entities includes organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes; the prevention of cruelty to animals or children; or the development of amateur sports. Nonprofit veterans’ organizations, fraternal lodge groups, cemetery and burial companies, and certain legal corporations can also qualify, but only if
donations are designated for eligible purposes.

To determine whether an organization qualifies to receive deductible contributions, the IRS Tax Exempt Organization Search tool can help verify an organization’s tax-exempt status and determine its eligibility for deductible contributions. A donation to a federal, state, or local
government may be eligible if the gift is earmarked for public purposes (such as maintaining a public park). Gifts to benefit a particular individual, a for-profit business, or a private interest do not qualify as deductible charitable contributions.

To get the potential tax benefits, nonitemizers must claim the charitable contribution deduction on IRS Form 1040. Except for the special benefit for nonitemizers, which expires after 2021, charitable contributions must be claimed as itemized deductions on Schedule A

‘Quid Pro Quo’ Contributions Allowed Only Partial Deduction

For certain donations, some calculation is required to determine the amount that can be deducted. These include “quid pro quo” donations for which the donor receives an economic benefit—e.g., goods or services—in return for the gift.  If a donor receives a T-shirt “for a cause” in return for a contribution, then the entire amount of the contribution is not deductible. The deduction is limited to the amount of the contribution that exceeds the fair market value of the shirt.

For example, if the contribution is $40, and the fair market value of the T-shirt is $20, then the deductible amount is only $20 ($40 donation minus the shirt’s $20 value). The same rule applies for contributions for events like charity dinners, where the fair market value of the meal must be subtracted from the cost of the event to determine the amount of the deduction.

Deduction for Donated Goods Set at Fair Market Value

Charitable contribution deductions are allowed for donations of goods, including clothes, household items, and more to Goodwill, The Salvation Army, and similar charities. But these types of noncash gifts have their own rules. Used clothing and household items must be in usable good condition; additional regulations apply to vehicle donations. The amount of the deduction is limited to the item’s fair market value at the time of contribution—e.g., its thrift-store price.

Some tax preparation programs include a calculator to help determine items’ fair market values. When a taxpayer claims more than $500 in total deductions for noncash contributions, IRS Form 8283 must be filed with the tax return. IRS Publication 561  is a useful resource to help you decide the value of your noncash contributions.

Only taxpayers who itemize their deductions can deduct donations of property as charitable contributions. The 2021 charitable deduction for nonitemizers is limited to contributions made
in cash.  

Deductions Require Records

Taxpayers must keep detailed records to support their charitable deductions. To claim a deduction for cash, you must have a written record, canceled check, or bank/payroll debit. Every contribution of more than $250 in cash or property must be backed by a written acknowledgment from the donee stating the amount of the contribution, whether or not any goods or services were provided to the contributor, and the fair market value of any such goods or services. Significant property contributions also require appraisals.

Charitable Donation Limits: Special 2021 Rules

For 2021, single taxpayers who claim the standard deduction on their tax returns are entitled to deduct up to $300 of charitable contributions made in cash. This deduction is allowed “above-the-line”—that is, in calculating their adjusted gross income (AGI). Married couples filing joint returns can claim up to $600 for cash contributions.

Certain types of contributions are not eligible for the special deduction for nonitemizers, including (1) gifts of non-cash property, such as gifts of securities; (2) contributions to private nonoperating foundations; (3) donations to supporting organizations and new or existing donor-advised funds; and (4) contribution carryforwards from earlier years. Also, contributions to nonprofit organizations that do not qualify as charities under the tax law, such as veterans’ organizations, fraternal societies and certain cemetery and burial companies, are not eligible for the special deduction.

The above-the-line deduction will benefit many taxpayers who do not itemize. Because of the present high levels for the standard deduction and the ceiling on state and local tax deductions,
many taxpayers realize greater tax savings by claiming the standard deduction rather than itemizing. The 2021 standard deduction is set at $25,100 for joint returns, $12,550 for single individuals and married persons filing separately, and $18.800 for heads of household. An additional amount of $1,350 for each married individual over age 65 or blind, or $1,700 for single individuals, married persons filing separately and heads of household who are over age 65 or blind. An individual who is both over 65 and blind is entitled to double the additional amount. State and local tax deductions are capped at $10,000 ($5,000 if married and filing separately).

Often, taxpayers whose total itemized deductions, including charitable deductions, for a year would be less than the standard deduction are advised to group their charitable contributions into a single tax year to maximize their tax savings. They may choose to donate in one year the gifts that they might otherwise donate over two years, then skip a year. For 2021, some taxpayers, particularly those at low- and middle-income levels with modest charitable contribution totals, may find that the special $300 and $600 deduction negates any benefit from grouping two or more years of charitable gifts. 

Raised Deduction Caps

For 2021, The 2020 increase allowed in the ceiling on deductions for charitable contributions of cash to certain organizations is extended one year into 2021. Prior to 2020, the deduction for cash contributions to qualifying organizations was limited to 60% of individuals’ contribution base, which is generally equal to a taxpayer’s adjusted gross income (AGI), calculated without any net operating loss carrybacks. For 2021, taxpayers may deduct the amount of their cash charitable contributions to qualifying organizations in excess of their allowable noncash charitable contributions and charitable gifts to other organizations, up to the full amount of their AGI. To take advantage of this 100% ceiling, taxpayers must affirmatively elect it. This higher ceiling will enable some taxpayers to eliminate all of their taxable income. If a taxpayer’s contributions exceed the ceiling, then the unused amount may be carried forward for up to five years.

The organizations that qualify for the increased ceiling for cash contributions are entities operated for religious, charitable, scientific, literary, or educational purposes; for the prevention of cruelty to animals or children; or for the development of amateur sports; as well as private operating foundations and certain governmental units. For non-cash contributions and gifts to non-qualifying organizations, which include (1) private nonoperating foundations, (2) supporting organizations and existing or new donor-advised funds, and (3) other charitable organizations that do not qualify as public charities, total deductions continue to be capped at 20% to 50% of the taxpayer’s AGI depending the type of property and tax-status of the donee organization.

Noncash contributions are not eligible for the increased ceilings. Noncash contributions to qualifying organizations continue to be capped at 50% of the individual donor’s AGI. Noncash donations to non-qualifying entities continue to be capped at 30% of the individual donor’s AGI. Also, contributions of appreciated capital gain property generally are capped at 30% of AGI if made to qualifying organizations, and 20% of AGI in the case of non-qualifying organizations, including private nonoperating foundations.

The higher ceiling on itemized deductions for 2021 offers a tax-planning opportunity that is potentially attractive to high-bracket taxpayers who make charitable contributions in cash. High-bracket taxpayers planning to make significant cash contributions in 2022 or later might evaluate whether making such gifts in 2021 to take advantage of the temporary higher ceilings would result in greater tax savings than spreading the gifts over two or more years. 

2021 Benefits for Businesses

Businesses making charitable contributions in 2021 also are eligible for some increased benefits. Sole proprietors and owners of “pass-through” business entities report the deductions on their own returns in accordance with the rules for individual taxpayers, including the increased ceilings for cash gifts. For C corporations, contribution limits are increased for cash donations from 10% to 25% of taxable income (with some adjustments). The 25% cap does not apply automatically; it must be elected on a contribution-by-contribution basis.  

Special rules apply to businesses’ contributions of food inventory. The cap on such contributions generally is increased from 15% of net income for owners of pass-through businesses and from 15% of taxable income for C corporations to 25% in each case.

Other Benefits for Specific Circumstances

From time to time, the tax code provides ceilings higher than those generally applicable for special-interest situations—for example, to assist recovery from a disaster or to benefit a specific industry or purpose. Currently, a qualified farmer or rancher can claim a qualified conservation deduction of up to 100% of adjusted gross income (less other allowable charitable deductions) for a contribution of property for agriculture or livestock production, provided that the property continues to be used or be available for such production.

The Bottom Line

For the 2021 tax year, special temporary rules extend for a single year the more generous tax treatment allowed in 2020 for charitable contributions and thereby the increased tax benefits for charitable gifts made in cash.

For specific guidance about what is and isn’t allowed, check the IRS website article on expanded
charitable contribution deductions
for specific information for 2021. In addition, download a copy of IRS Publication 526 and Form 8283 (for noncash charitable donations) for easy reference.

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