- Learn more about changes to charitable contributions for non-itemizers.
- Discover the penalties for contribution overstatement.
- Find out how to document cash contributions for itemizers.
- Learn about substantiation requirements.
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). Fiducial has more information on this potential deduction below!
Changes to charitable contributions deductions
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 charitable contributions made in cash during 2021. Married couples filing jointly may take a deduction of up to $600 for the cash contributions they make during 2021. This is an increase from 2020, when a $300 contribution limit existed regardless of filing status. However, charitable 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. However, 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. However, on 2021 returns, the deduction will be taken after the AGI is figured. This distinction matters because the AGI amount limits many credits and other tax benefits.
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 enacted in March 2020, Congress suspended the 60% deduction limit on cash contributions to most charities for 2020. This allowed 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, Congress extended the suspension of the 60% limit to 2021.
Cash contributions include those paid by cash, check, electronic funds transfer or credit card. Taxpayers cannot deduct a cash contribution, regardless of amount, unless they can document the contribution in one of these ways:
- A bank record that shows the name of the qualified organization, date of the contribution, and 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. The receipt must show the name of the organization and the date as well as 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 charitable contributions made to it by payroll deduction.
Claiming your deduction
To claim a deduction for a charitable 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.
Have questions related to how charitable contributions might affect your tax return or how to document charitable contributions of any type? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.