Expanded Tax Benefits for Charitable Contributions

As a result of the COVID-19 pandemic, Congress ushered in legislation to lighten the tax burden on individuals and businesses. The Coronavirus Aid, Relief, and Economic Security (CARES) Act included provisions to assist taxpayers who contributed to charity during the tax years impacted by the pandemic. A new law enacted last December, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends and expands the original guidelines set by the CARES Act to create more favorable incentives to make charitable contributions.

Deductions for Individuals

Typically, individual taxpayers who do not choose to itemize cannot claim any deduction for charitable contributions. The threshold to itemize has significantly risen over the last few years and, as such, nearly 9 in 10 taxpayers elect to take the standard deduction. Under the new tax provisions previously mentioned, taxpayers who do not itemize can claim a deduction for cash contributions to qualifying charities - $300 for single filers and $600 for married filing joint filers. See IRS Publication 526 for additional information on the types of organizations that qualify.

Also, taxpayers who itemize are permitted to deduct contributions up to 100% of their adjusted gross income (AGI). In recent years, these deductions were limited to 30% to 60% of a taxpayer's AGI. The new ceiling has been introduced to encourage continuing donations during the pandemic. Excess charitable contributions over this new limitation may be carried forward for up to five years.

Donations for Corporations

The new legislation also allows C corporations to raise the limit of charitable donations from 10% of their taxable income to 25%. This increased corporate limit does not automatically apply, however. It must be elected for each contribution. If you are interested in this election and need assistance, please contact us.

Another key provision for businesses is donated food inventory. For donations made in 2021, the contribution limits increased from 15% to 25% of a C corporation's taxable income, and the limit is based on aggregate net income for all other businesses.

Records

As a reminder, the IRS encourages all taxpayers to keep an accurate record of all charitable contributions. Typically, this is in the form of a receipt or acknowledgement letter received from the charity. If you would like to discuss if these new tax updates apply to you or your business, please contact us.