Charitable Contributions: Tax Breaks and Limits

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Charitable Contributions: Tax Breaks and Limits

Charitable gifts are one of the finest ways to save money on taxes. Not only does the charity profit, but taxpayers gain as well since they may deduct a portion or all of their donations on their tax returns. Two special regulations prolong and broaden the favourable tax treatment for eligible monetary donations made in 2021 for income taxes payable on April 15, 2022:

  1. Even if you don’t itemize, you may deduct up to $300 if you’re single or married filing separately (or $600 if married filing jointly) for financial donations made to eligible charities.
  2. If you itemize, you may deduct charitable donations from your taxable income up to 100% of your adjusted gross income (AGI).

These tax breaks will expire after the 2021 tax year unless Congress updates the statute, which has not happened as of January 13, 2022.

Key Takeaways

  • To be deductible, a charitable gift must be made to a qualifying organization as defined by tax law.
  • The overall amount of charitable donation deductions is limited by annual AGI restrictions.
  • Certain deductions are subject to special limitations depending on the kind of property given and the type of tax-exempt entity receiving the contribution.
  • Non-itemizers may deduct up to $300 in cash donations on single returns (or $600 if married filing jointly) in addition to the standard deduction.
  • The typical AGI limit on charitable donations is raised to 100% of AGI in 2021, allowing taxpayers to deduct up to 100% of AGI for cash contributions given to qualifying organizations. As of January 13, 2022, the IRS has not declared the tax year 2022 cap.

The Basics of the Charitable Contribution Deduction

The tax treatment of a charitable gift varies depending on the kind of given asset and the receiving organization’s tax-exempt status. Individual, company, and corporate contributions are subject to different rules. Furthermore, the deduction amount is subject to standards and restrictions.

Which Donations Qualify for Deductions?

Deductions are only permitted for charitable gifts, according to tax law. A beneficiary organization must meet the tax code’s requirements for tax-exempt status, as established by the Internal Revenue Service (IRS).

Organizations that operate only for religious, philanthropic, scientific, literary, or educational reasons; the prevention of cruelty to animals or children; or the growth of amateur sports are all eligible. Nonprofit veterans’ organizations, fraternal lodges, cemetery and burial firms, and some legal entities may also qualify if contributions are specified for appropriate purposes.

The IRS Tax Exempt Organization Search tool may assist in determining an organization’s tax-exempt status and eligibility for deductible donations. A contribution to a federal, state, or municipal government that is designated for public use may be acceptable (such as maintaining a public park).Gifts made to assist a specific person, for-profit corporation, or private purpose are not deductible charitable gifts.

Nonitemizers must claim the charitable donation deduction on IRS Form 1040 to get the possible tax advantages. Except for the nonitemizer exemption, which expires in 2021, charitable donations must be reported as itemized deductions on Schedule A.

“Quid Pro Quo” Contributions

Certain gifts need some math to determine the amount that may be deducted. These include “quid pro quo” gifts, in which the donor obtains an economic gain in exchange for the gift (e.g., products or services).

For example, if a donor gets a T-shirt in exchange for a gift, the deduction is restricted to the portion of the contribution that exceeds the shirt’s fair market value. So, if the contribution is $40 and the T-fair shirt’s market value is $20, the deductible amount is $20 (the $40 gift less the T-$20 shirt’s value).

The similar rule applies to donations for charitable events such as charity dinners, where the fair market value of the meal must be reduced from the event cost to establish the amount of the deduction.

Deduction for Donated Goods Set at Fair Market Value

Donations of products to Goodwill, the Salvation Army, and other comparable organizations are eligible for charitable contribution deductions. Used clothes and household goods must be in excellent working order, and the deduction amount is restricted to the item’s fair market value at the time of contribution—for example, the price at a thrift shop.

  The 20/10 Rule of Thumb

Vehicle contributions are subject to additional regulations. If the fair market value of a vehicle (car, boat, or aircraft) exceeds $500, you may deduct the lesser of:

  • The organization’s gross revenues from the sale of the car
  • The fair market value of the vehicle on the date of donation

In contrast, if the fair market value is less than $500, you may deduct the lesser of the following:

  • $500
  • The fair market value of the vehicle on the date of donation

When a person claims more than $500 in total non-cash contribution deductions, they must submit IRS Form 8283 along with their tax return. Calculators are included in certain tax preparation software products to assist in determining the fair market value of different things. IRS Publication 561 might assist you in determining the value of your non-cash donations.

Property gifts may only be deducted as charitable contributions by taxpayers who itemize their taxes. The 2021 charity deduction for nonitemizers is restricted to cash donations, but as of Jan. 13, 2022, the IRS has not specified the contribution amount or itemizations that will be permitted.

Records to Substantiate Contributions

To justify charity deductions, taxpayers must maintain meticulous records. The kind of record is determined by the type and quantity of contribution: cash, non-cash, and out-of-pocket expenditures incurred while volunteering your services.

Cash Contributions

Donations provided in cash, cheque, electronic money transfer, online payment systems, debit cards, credit cards, payroll deduction, or the transfer of a gift card redeemable for cash are examples of monetary contributions. To deduct any amount of monetary contributions, you must have at least one of the following:

  • A bank document that includes the eligible organization’s name, the date of the donation, and the amount of the gift. Cancelled checks, bank statements, credit card statements, and electronic money transfer receipts are examples of bank records.
  • A receipt or written notification (including email) from the organization indicating the name of the organization as well as the amount and date of the gift
  • Payroll deduction documents (such as a pay stub or W-2) that indicate the name of the organization as well as the amount and date of the donation

Cash contributions greater than $250 must be accompanied by a written acknowledgement from the organization detailing the amount of the contribution, whether the organization provided any goods or services to the donor as a result of the contribution, and a description and good faith estimate of the value of any such goods or services. Significant property donations require evaluations as well.

Non-cash Contributions

Non-cash contribution substantiation requirements vary based on the size of the donation:

  • Less than $250: A receipt from the organization including the name of the organization, the date and place of the gift, and a description of the property.
  • Between $250 and $500: “Contemporaneous written acknowledgment” of the organization’s contribution—the acknowledgment must be written and include a description of the property, whether the organization provided you with any goods or services in exchange for the donation, and a description and good faith estimate of the value of any such goods or services.
  • Between $500 and $5,000: Contemporaneous written acknowledgement is required, and Form 8283 must be filed with your tax return.
  • Over $5,000: Contemporaneous written acknowledgment, a written appraisal of the property from a qualified appraiser, and filing Form 8283 with your tax return.

Out-of-pocket Expenses

To deduct out-of-pocket costs for volunteer activities, you must get an acceptance from the organization that includes the following information:

  • A description of the services you provided
  • A statement of whether the organization gave any goods or services to the donor as a result of the contribution
  • A description and good faith estimate of the value of any such goods or services

Charitable Donation Limits: Special 2021 Rules

Single taxpayers who use the standard deduction on their tax returns in 2021 may deduct up to $300 in cash charitable donations. Married couples filing jointly may deduct up to $600 in monetary donations.

Certain forms of donations are not qualified for the nonitemizer’s special deduction, including:

  • Gifts of non-cash property, such as gifts of securities
  • Contributions to non-profit private foundations
  • Donations to charitable organizations, as well as new or existing donor-advised funds
  • Contribution carryovers from previous years
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Contributions to nonprofit organizations that do not meet the definition of charity under the tax code, such as homeowner’s associations and political groups and candidates, are not eligible for the special deduction.

Many people who do not itemize benefit from the deduction. Because of the current high levels for the standard deduction and the cap on state and local tax deductions, many taxpayers save more money by taking the standard deduction than than itemizing. To maximize tax savings, taxpayers whose total itemized deductions would be less than the standard deduction are sometimes encouraged to combine their charitable donations into a single tax year. They may opt to give in one year what they would normally donate over two years, then skip a year.

Some taxpayers, especially those with low and middle-incomes and moderate charitable contribution totals, may discover that the special $300 and $600 deductions cancel out any gain from combining two or more years of charitable giving for 2021 taxes.

Because the Internal Revenue Service has not yet issued tax laws for the tax year 2022, planning for the 2023 filing system as of January 2022 may be difficult.

Standard Deductions for 2021 and 2022 Taxes

The standard deduction for joint returns in 2021 is $25,100, $12,550 for singles and married couples filing separately, and $18.800 for heads of household.

The standard deduction increases somewhat for tax year 2022 (returns are normally filed in 2023). For the tax year 2022, the standard deduction for married couples filing jointly is $25,900; for single taxpayers and married persons filing separately, the standard deduction is $12,950; and for heads of households, the standard deduction is $19,400.

Married filing jointly and married filing separately taxpayers who are at least 65 years old or blind in 2021 may claim an additional $1,350 standard deduction; single filers and heads of household can claim an additional $1,700 deduction. In 2022, the sum will be between $1,400 and $1,750.

Individuals over the age of 65 who are also blind are eligible to twice the extra amount in 2021 and 2022. In both 2021 and 2022, state and local tax deductions are limited to $10,000 ($5,000 if married filing separately).

Raised Deduction Caps

The increase for cash contribution deductions in 2020 is prolonged by one year to 2021. Prior to 2020, the deduction for cash donations to eligible organizations was restricted to 60% of an individual’s contribution base, which is typically equal to a taxpayer’s adjusted gross income (AGI) less any net operating loss carrybacks.

Taxpayers may deduct the amount of their cash charitable donations to eligible organizations that exceed their permissible non-cash charitable contributions and charitable gifts to other organizations, up to the full amount of their AGI, in 2021. To take advantage of this 100% limit, taxpayers must intentionally elect it (it is not automatic, for example). Because of the greater cap, some individuals may remove all of their taxable income. If a taxpayer’s contributions surpass the limit, the excess may be carried forward for up to five years.

Entities that operate for the following purposes are eligible for the enhanced financial contribution ceiling:

  • Purposes such as religious, benevolent, scientific, literary, or educational
  • Animal or kid brutality must be avoided.
  • The growth of amateur sports

Non-Cash Gifts

Total deductions for non-cash contributions and gifts to non-qualifying organizations, which include private non-operating foundations, supporting organizations, donor-advised funds, and other charitable organizations that do not qualify as public charities, remain limited to 20% to 50% of the taxpayer’s AGI, depending on the type of property and tax status of the donee organization.

The new limits do not apply to non-cash donations. Noncash donations to qualified organizations are still limited to 50% of the individual donor’s AGI. Non-cash contributions to non-qualifying entities are still limited to 30% of the individual donor’s AGI. Furthermore, donations of appreciated capital gain property to qualified organizations are normally restricted at 30% of AGI, and 20% of AGI in the case of non-qualifying organizations, including private non-operating foundations.

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The increased itemized deduction limit for 2021 provides a tax-planning option that may be appealing to high-income taxpayers who make cash charitable donations. High-income taxpayers considering making large cash contributions in 2022 or later should consider whether making such donations in 2021 to take advantage of the temporary higher limitations will result in larger tax savings than extending the gifts over two or more years.

2021 Benefits for Businesses

Businesses that make philanthropic donations in 2021 are also eligible for certain enhanced advantages. Sole proprietors and owners of pass-through company entities record the deductions on their own returns in line with the rules for individual taxpayers, including the higher cash gift limitations.

Cash contribution limitations for C companies are doubled from 10% to 25% of taxable income (with some adjustments).The 25% limit is not automatically applied; it must be chosen on a contribution-by-contribution basis.

Note: As of January 13, 2022, the advantages for businesses in the 2022 tax year, which is generally filed in 2023, had not been revealed.

Special requirements apply to food inventory donations made by enterprises. In general, the ceiling on such contributions rises from 15% of net income for owners of pass-through enterprises to 25% of taxable income for C corporations.

Other Benefits for Specific Circumstances

The tax law sometimes allows greater limits than are typically applicable to special-interest circumstances, such as assisting in catastrophe recovery or benefiting a certain sector or purpose.

A qualified farmer or rancher can currently claim a qualified conservation deduction of up to 100% of their adjusted gross income (less other allowable charitable deductions) for a contribution of property for agriculture or livestock production as long as the property is used or available for such production.

Is the $300 Deduction for Nonitemizers Available for 2021?

Yes. Single nonitemizers may deduct up to $300 in cash gifts to qualified organizations for the 2021 tax year. The deduction for married couples using the standard deduction in 2021 has been doubled; they may now deduct up to $600 in cash contributions. Public charities and running foundations are eligible, but not private foundations, supporting organizations, or donor-advised funds. Unless the current legislation is renewed, this unique deduction will be unavailable in 2022. And it has not been renewed by Congress as of January 13, 2022.

How Much Can Taxpayers Who Itemize Deduct for Charity?

The tax year 2021 has a particular, significant allowance. Individual itemizers are typically permitted to deduct up to 60% of their AGI for financial gifts to qualifying organizations. However, beginning in 2021, they will be able to deduct cash donations amounting to 100% of their AGI. Non-monetary contributions and gifts to organizations that do not qualify for the special rule will lower the limit for eligible cash donations.

Corporations will also have a higher limit for monetary charitable donations in 2021. For “C” companies, the cash gift limit rises from 10% to 25% of taxable income (with various modifications).

Unless the current legislation is renewed, this unique deduction will be unavailable in 2022. And it has not been renewed by Congress as of January 13, 2022.

Do the Increased AGI Ceilings on Charitable Deductions Apply Automatically?

Individual and business taxpayers must voluntarily choose the higher cash charitable contribution limits. Individuals must elect particular contributions and disclose their selections on Form 1040 or Form 1040-SR. Similarly, C Corporations must choose whether to apply the 25% contribution limit on a contribution-by-contribution basis.

The Bottom Line

In response to financial stress and economic uncertainty, Congress provided taxpayers with an unique chance to benefit from tax savings by deducting all or a portion of their charitable donations on their tax returns for tax years 2020 and 2021. However, this is a particular temporary regulation, and as of January 13, 2022, there is no indication that taxpayers will continue to benefit from this specific charitable donation tax advantage in the future.

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