If you’re charitably inclined, keep in mind that last year’s CARES Act — supplemented by the Consolidated Appropriations Act of 2021 (CAA) — enhanced several tax incentives for charitable deductions for donations made through the end of 2021. Here’s a summary:
What’s the charitable deductions limit?
For individuals who itemize, eligible charitable donations in 2021 are deductible up to 100% of adjusted gross income (AGI), a jump from 60% in 2020. The higher limit generally applies to cash gifts to public charities, such as religious organizations, hospitals and educational institutions. It doesn’t apply to 1) noncash gifts, 2) gifts to private foundations or other nonpublic charities (with limited exceptions), or 3) gifts to certain public charities, namely, donor-advised funds (DAFs) and supporting organizations.
Limit for non-itemizers
For non-itemizers who otherwise wouldn’t be entitled to charitable deductions, the CARES Act provided a $300 above-the-line deduction (that is, a deduction from gross income in determining AGI) for 2020. The legislation wasn’t clear as to whether married couples filing jointly were entitled to a $600 deduction. However, in its 2020 instructions to Form 1040, the IRS provided that the $300 limit applied both to individuals and to married couples filing jointly. The CAA extended the deduction to 2021 and doubled the limit to $600 for joint filers. Like the 100%-of-AGI deduction limit, the above-the-line deduction generally applies to cash gifts to public charities other than DAFs and supporting organizations.
What about business donations?
In 2021, corporations may deduct charitable donations up to 25% of their taxable income, up from 10%. Like the enhanced contribution limits for individuals, the 25% limit on corporate donations generally applies only to cash gifts to public charities other than DAFs or supporting organizations. In addition, for both corporate and noncorporate businesses, the limit on charitable deductions for qualified donations of food inventory is increased this year from 15% to 25% of taxable income.
Given the enhanced limits on charitable deductions, it may be tempting to make very large donations this year. Keep in mind, however, that depending on your tax circumstances, there may be advantages to spreading charitable deductions over several years. Your tax advisors can help you formulate a tax-effective strategy.