2021 has been, to put it as nicely as I can, one heck of a year.
We commemorated the 20th year since the Sept. 11 foreign terrorists' attacks. We've had major and deadly natural disasters. We're still dealing with the COVID-19 pandemic. And we've got 3½ months to go.
All these events, and the possibility of more (hurricane season, for example, lasts until the end of November), have underscored the need for help.
People have lost family, friends, property, jobs, and peace of mind. Many are depending on the kindness of strangers and nonprofit groups to help them make it through temporary tough times or, in too many instances, literally survive.
If you've been spared, relatively speaking, and can offer some help, please do. Donating to groups that provide services to those in need, whatever the causes of their crises, is a good way to do that.
And in 2021, tax law changes mean that donors might be able to get some added tax benefit for their goodwill.
Here's a quick overview of four expanded tax benefits this year for both individuals and businesses.
1. Larger deduction for nonitemizers: In most tax instances, you must itemize expenses to get a deduction for your charitable gifts. Since, according to the Internal Revenue Service, nearly nine in 10 taxpayers take the standard deduction, especially after those amounts were almost doubled by the Tax Cuts and Jobs Act of 2017, they don't get the donation deduction.
However, a new law now allows for a limited deduction on 2021 federal taxes for cash contributions made to certain qualifying charitable organizations. And this tax year, it was increased for married couples filing joint returns.
Individual taxpayers, including married people filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. Married couples filing jointly get twice that, $600 directly on their Form 1040s.
Cash is the term used by the IRS, but it doesn't mean just U.S. currency. Cash contributions include those made by check, credit card or debit card, as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization.
2. More donations if you itemize: Tax law usually limits the amount of donations that a person can deduct when itemizing on Schedule A. You can only give up to a certain percentage of your adjusted gross income (AGI).
These limits typically range from 20 percent to 60 percent of AGI, depending on the type of contribution and type of charitable organization. For example, a cash contribution made by an individual to a qualifying public charity, those known as 501(c)(3) nonprofits, generally is limited to 60 percent of the taxpayer's AGI. Contributions in excess of that percentage may be carried forward for up to five tax years.
For 2021, however, the individual contribution limit for cash donations to qualifying charitable organizations is increased to up to 100 percent of AGI. To take advantage of the increased limit, you must make the election to do so for any given qualified cash contribution when you file your Form 1040 or 1040-SR.
3. Corporate giving limit also hiked: Tax law now also permits C corporations to apply an increased limit. It's up to 25 percent of the corp's taxable income, again for cash donations to eligible charities during 2021. Normally, the maximum allowable corporate deduction is limited to 10 percent of taxable income. As with the individual increase, C corporations must elect the increased corporate limit on a contribution-by-contribution basis.
4. Food donations increased, too: Businesses donating certain food inventory also may qualify for increased deduction limits. For contributions made in 2021, the limit for these contribution deductions is increased from 15 percent to 25 percent. As noted in item #3, the 25 percent limit for C corporations is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their aggregate net income for the year from all trades or businesses from which the contributions are made. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.
Take advantage in 2021: These four just-discussed enhanced tax deductions for donations are temporary. They apply, for not, only to the 2021 tax year.
They are part of The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted in late December that year. That bill extended the changes originally enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The charitable tax breaks will be erased from the Internal Revenue Code in 2022, unless Congress acts to extend them, either for another temporary period or permanently.
Since we can't be sure what might happen, if you or your business are eligible for these tax donation tax benefits, you need to make your charitable gifts this tax year.
Existing donation rules remain: That donation timing is just one of some longstanding charitable deduction tax rules that didn't change.
The tax code requires that for any eligible donations to be claimed on a tax return, the gift must be made by the last day of the tax year. So make your gifts by Dec. 31 if you want to deduct them on your 2021 taxes next filing season.
Also, the charities must be IRS approved. That means they have registered with the tax agency and it has OK'ed them as 501(c)(3) organizations. That gives them the ability as a public charity to accept donations that the donors can deduct.
You can check a nonprofit's status by using the IRS' Tax-Exempt Organization online search tool. You also can look into the legitimacy and efficiency of nonprofits via watchdog groups, such as Candid, Charity Navigator, the Better Business Bureau Wise Giving Alliance, and Charity Watch.
Finally, keep good records of all your donations. You don't need to send them (or copies) to the IRS when you make the claim on your return. But if the IRS has questions about your charitable gift, the records will help prove your donation was legitimate and deductible.
Reputable charities will send you an acknowledgment letter (or email). You also can keep the cancelled check or credit card receipt for contributions you make. For donations of property, additional recordkeeping rules apply, including the filing a Form 8283 and obtaining a qualified appraisal in some instances.
More on charitable contribution tax requirements can be found in IRS Publication 526.
Whatever you can and decided to give, thank you. I know most people give because they care, not because of tax benefits. But if you do qualify for tax relief, you should take it, too. It could mean you'll continue to be able to help others.
You also might find these items of interest:
- Boxing Day 2020 giving ideas and tax tips
- 5 ways to determine whether a charity is naughty or nice
- Nonprofits' tax status reviews sometimes aided by public tips