In my last column, I wrote about the enormous tax advantages of placing highly appreciated stock in a donor-advised fund at your local community foundation, particularly when “bunching” several years of tax deductions into a single year. In the column titled “Maximizing Your Charitable Deduction,” I noted that this has long been a highly effective way to avoid capital-gains taxes and reduce income taxes, thereby maximizing your ability to give back to the community.
Thankfully, this giving strategy will be around for the foreseeable future, but there are several short-term changes to charitable tax law that are expiring Dec. 31. You’ll need to act fast to take advantage of them.
Let me begin with one caveat. I am neither an attorney nor an accountant, which is something I lament every time my children’s college tuition bills come due. Please check with your own personal wealth adviser to understand how these general strategies will affect your specific tax situation.
When Congress passed the Taxpayer Certainty and Disaster Tax Relief Act in 2020, it temporarily extended several changes in tax law that were originally enacted during the early days of the pandemic through the Coronavirus Aid, Relief and Economic Security (CARES) Act. The IRS recently issued guidance (IR-2021-190) reminding taxpayers that they have until Dec. 31, 2021, to take advantage of these giving strategies.
Charitable Deduction in 2021 for Non-Itemizers
Contributions that you make to charity are normally reported to the IRS on your 1040 Schedule A, the form used to itemize deductions. The standard deduction for the average taxpayer is $12,550 for individuals and $25,100 for married couples. The overwhelming majority of folks don’t have nearly enough deductions to exceed these levels, so nearly nine out of every 10 taxpayers claim the standard deduction instead. In practical terms, this means that during a typical year, almost 90% of us receive absolutely no tax benefit at all for the charitable gifts we so generously make.
However, through the end of 2021, there is a special deduction available for individuals who do not itemize their taxes.
“Ordinarily, individuals who elect to take the standard deduction cannot claim a deduction for their charitable contributions,” according to the IRS. “The law now permits these individuals to claim a limited deduction on their 2021 federal income-tax returns for cash contributions.”
Through the end of this year, individuals can claim a deduction of up to $300 for most cash contributions they make to charity, and married couples filing jointly can claim a maximum deduction of $600 without having to file a Schedule A to itemize their deductions.
Temporary 100% Limit on Contributions for Itemizers
For the 10% of folks who itemize their deductions during a typical year regardless, Congress has offered a temporary benefit as well.
The charitable gifts that itemizers can deduct on their taxes is normally capped as a percentage of their adjusted gross income. The specific limit can range from 20% to 60%, depending on the type of asset and the kind of charity receiving the gift. Regardless, the IRS says that the “law now permits electing individuals to apply an increased limit, up to 100% of their adjusted gross income, for qualified contributions made during calendar year 2021.”
Although cash contributions to most charitable organizations qualify for the temporary 100% limit, the IRS says it does not apply to donations to private foundations, supporting organizations, donor-advised funds and most charitable remainder trusts.
Corporate Limit Temporarily Raised to 25%
During a normal year, the maximum allowable deduction that a corporation can claim for gifts to charity is capped at 10% of the company’s taxable income. Congress has temporarily raised that limit to 25% of corporate taxable income for charitable contributions made in 2021.
The IRS reminds us that companies should be aware that the increased corporate limit applies to C corporations and that the tax filer must elect the increased limit on a contribution-by-contribution basis.
Increased 2021 Business Limits on Donated Food
Businesses that donate food inventory for the “care of the ill, needy and infants” may also qualify for increased limits on those in-kind contributions. The IRS announced that for “[qualified food inventory] contributions made in 2021, the limit for these contribution deductions is increased from 15% to 25% [of the business’s taxable income].”
The increased limit of 25% specifically applies to C corporations. The IRS says that sole proprietorships, partnerships and S corporations will generally qualify for a higher limit, but the amount will vary based on other factors.
Contact Bret Bicoy at [email protected].