Changes to Charitable Contribution Deduction in 2021
With a few days left to implement tax strategies in 2021, consider taking advantage of the latest changes to charitable contribution rules before the expire.
Normally, charitable contributions are part of your "itemized deductions," which includes mortgage interest, state taxes, out of pocket medical expenses and more. Normally, taxpayers will itemize if the total of all of these deductions is greater than the standard deduction. With the Tax Cuts and Jobs Act in 2019 enacted by Trump, the standard deduction was raised, which made the hurdle higher for taxpayers to benefit from itemizing.
In 2020, in response to the COVID-19 pandemic, charitable contributions were able to be deducted for up to $300 per tax return even if the taxpayer took the standard deduction. This means that if you donated the maximum, you effectively got a standard deduction of $12,300 instead of $12,000 if you were single. In 2021, this is extended and improved. You now get up to $300 for single and $600 per joint return deducted in 2021 whether or not you itemize.
Per the IRS, taxpayers who itemize can generally claim a deduction limited to 20%-60% of their adjusted gross income and varies depending on the type of contribution and the type of charity. The law now allows taxpayers to apply up to 100% of their AGI, for calendar-year 2021 qualified contributions. Qualified contributions are cash contributions to qualifying charitable organizations. The 100% limit is not automatic; the taxpayer must choose to take the new limit for any qualified cash contribution. Otherwise, the usual limit applies. The taxpayer's other allowed charitable contribution deductions reduce the maximum amount allowed under this election. Eligible individuals must make their elections on their 2021 Form 1040 or Form 1040-SR.
Remember that these are cash contributions to qualifying organizations, not goods donations.
So, what are qualifying organizations? These include:
Nonprofit educational institutions
Nonprofit medical institutions
These deductions do not apply toward donations:
Made to a supporting organization
Intended to help establish or maintain a donor-advised fund
Carried forward from prior years
Made to most private foundations
Made to charitable remainder trusts
If you do plan to donate, make sure you have documentation of the payment, who the recipient is, proof the deduction is eligible and that you provide this information to your tax professional.