Congress recently passed new tax laws that boost charitable tax breaks. The changes took effect at the end of December 2020 and will increase charitable tax deductions in 2021. What are the changes and what do they mean for nonprofits?
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1. Above-the-Line Tax Deductions
What’s Changed?
The new tax laws continue 2020 CARES Act changes that increase the above-the-line individual tax deduction to $300. In addition, the new rules double the deduction for married couples filing jointly to $600.
The 2020 CARES Act did not have a provision that permitted couples to claim an additional amount over individual filers. Donations must be made in cash (rather than stocks or other assets like cars and clothing; credit cards and checks are OK) and go directly to a charity (donor-advised funds and private non-operating foundations do not count).
Why it Matters to Nonprofits
Under the 2017 tax law changes made under the Tax Cuts and Jobs Act, the standard deduction was raised so much that many individuals were left with little fiscal incentive to give to charity. With the new above-the-line deductions, individuals who do not itemize their deductions can still claim a deduction over and above the standard deduction (up to $300 for individuals and $600 for married filing jointly).
For example, joint filers in the 37% tax bracket would now be able to claim $222 in deductions if they gave $600 to charity in 2021.
2. Elimination of AGI Limits
What’s Changed?
The new tax rules also help large and corporate donors by eliminating percent of AGI limits for charitable deductions for individual donors and increasing it to 25% for corporate donors. These provisions are similar to those that were passed in the 2020 CARES Act.
Prior to the CARES Act, AGI limits were set at 60% for individuals and 10% for corporate donors. Non-cash contributions will continue to be capped at 50% AGI for individual donors. In addition, donations to private foundations, donor-advised funds, and veterans organizations and fraternal societies are capped at 30% of AGI.
Why it Matters to Nonprofits
AGI limits set a cap (in relation to taxable income) of the number of charitable deductions available to high-income and corporate givers.
For example, prior to 2020, an individual with an adjusted gross income of $1,000,000 would have been capped at $600,000 in giving that could be claimed as a charitable deduction. Under the new rules, that same individual could theoretically donate and claim the entire $1,000,000 as a charitable deduction.
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Other Things You Need to Know About Charitable Deductions in 2021
Quid-pro-quo donations or donations for which a donor receives some type of benefit (like a meal or t-shirt) require that the amount of benefit received by the donor be subtracted from the total contribution in calculating the claimed deduction.
For example, if you attended a benefit gala through the purchase of a $250 ticket but the value of your meal was $50, you would only be able to claim $200 towards your deduction.
In addition, filers should take care in documenting any charitable donations that they wish to deduct. The new rules heighten penalties for overstated charitable deductions from 20% to 50%. And contributions of more than $250 must be supported by a written record.
Finally, remember that only contributions to eligible registered charitable organizations are deductible under the new rules. That’s why it’s important for individual filers to check with the IRS’s list of eligible tax-exempt organizations AND for charitable organizations to make sure they are properly registered with the IRS and any state in which they do business or solicit funds.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.