Accounting

Tax 101: 2021 charitable contributions

Tax forms

The charitable contribution deduction allows taxpayers to support worthy causes via donations and decrease their tax liability at the same time. But how, exactly, will that donation impact your client’s 2021 tax return? Charitable contributions sustain nonprofit organizations that provide worthwhile services to our communities. Maximizing charitable contribution deductions can be both a useful financial planning tool for taxpayers and an essential way to support nonprofit organizations.

Background

Since 1917, taxpayers have been allowed to take a deduction on their tax return for gifts to qualified charitable organizations. Charitable contributions are itemized deductions on Form 1040, Schedule A, along with other itemized deductions like medical expenses, certain taxes and mortgage interest. However, taxpayers can itemize deductions only if the combined total deduction is higher than the standard deduction.

The 2017 Tax Cuts and Jobs Act changed the charitable contributions landscape for single taxpayers: The standard deduction nearly doubled from $6,350 in 2017 to $12,000 in 2018, causing charitable organizations and supporters to worry that the incentive for individuals to donate to nonprofits would decrease. Turns out those fears were warranted. According to IRS data, the percentage of taxpayers who itemized deductions dropped from approximately 31% in 2017 to only 11% in 2018.

New charitable deduction for non-itemizers

The 2020 Coronavirus Aid, Relief, and Economic Security Act introduced a new above-the-line deduction of up to $300 for cash contributions to qualified charitable organizations for taxpayers who do not itemize deductions. The Taxpayer Certainty and Disaster Tax Relief Act enacted in December of 2020 extended and modified the charitable contribution deduction for taxpayers who take the standard deduction. The amount allowed in 2021 is up to $300 for single taxpayers and up to $600 for married taxpayers for cash donations to qualified organizations. One change, however, is that the 2021 deduction is a below-the-line deduction (see Figure 1) in addition to the standard deduction, which means the 2021 charitable contribution deduction for non-itemizers does not affect adjusted gross income (AGI). Most tax benefit phase-outs are tied to the AGI, and taxpayers typically want the lowest AGI possible.

Figure 1: 2021 Draft Form 1040

 

2021 Draft Form 1040

 

Charitable deduction for itemizers

Taxpayers who took the standard deduction did not get all the perks of the expanded charitable contribution tax laws. Limitations on charitable contributions taken as itemized deductions are based on the type of gift and the type of charitable organization that receives the gift. Charitable contributions can be divided into three types of gifts: cash, capital gain property and ordinary income property.

Let’s start with cash gifts. Cash gifts given to a public charity are generally limited to 60% of AGI. In 2021, the deduction for cash contributions is up to 100% of AGI. For capital gain property given to a public charity, the fair market value (FMV) of the asset given may be deducted with a limitation of 30% of AGI. For capital gain property given to a nonoperating foundation, the basis is the amount of the deduction, and the limitation decreases to 20% of AGI. Gifts of ordinary income property are valued at the lower of basis or FMV amount, and the AGI limit is 50% if given to a public charity and 20% if given to a nonoperating foundation. Any excess contributions may be carried forward for five years. Table 1 summarizes the AGI limitations based on the type of gift and the recipient organization.

Table 1: 2021 charitable contribution limitations

Type of gift

Type of charitable organization

Type of deduction

AGI limitation

Cash

Public charity

Cash

100%

Cash

Nonoperating foundation

Cash

30%

Capital gain property

Public charity

FMV

30%

Capital gain property

Nonoperating foundation

Basis

20%

Ordinary income property

Public charity

Lesser of basis or FMV

50%

Ordinary income property

Nonoperating foundation

Lesser of basis or FMV

30%

The calculation for the AGI limitation for charitable contributions can be quite complex for taxpayers who give multiple gifts with various AGI limitations. Simply put, the highest AGI limitation is applied first, then the remaining balance is used to calculate the AGI limitations from highest to lowest AGI percentage limitation. Table 2 shows examples of AGI limitations for the three types of charitable gifts.

 

Table 2: AGI charitable gift limitation examples

Assume each example is an independent situation and the only gift given in the current year.

Scenario: A taxpayer with $100,000 AGI donates the following:

 

Amount of gift

Limitation

$120,000 cash to a 501(c)(3) organization

$120,000

$100,000 (100% of AGI)

$20,000 carried over for 5 years

$150,000 stock with a basis of $90,000 to a 501(c)(3) organization

$150,000

$30,000 (30% of AGI)

$120,000 carried over for 5 years

$130,000 stock with a basis of $55,000 given to a nonoperating foundation

$55,000

$20,000 (20% of AGI)

$35,000 carried over for 5 years

$70,000 stock with a basis of $110,000 given to a 501(c)(3) organization

$70,000

This is ordinary income property because the stock has decreased in value.

$50,000 (50% of AGI)

$20,000 carried over for 5 years

Proper planning reminders

To help clients maximize their tax benefit for giving to their favorite charities, tax preparers should familiarize themselves with changes to the tax laws for charitable contributions and advise their clients to:

  • Keep good records. In general, taxpayers should obtain a letter from the charity substantiating the gift and retain documentation of the check or credit card payment. For property donations, a Form 8283 Noncash Charitable Contributions must be filed for noncash contributions greater than $500.
  • Consider bunching charitable contributions in one year. For example, instead of giving to an organization in 2019, 2020 and 2021, give once in 2021. Bunching the contributions may allow taxpayers to itemize in the year they give the gift and take full advantage of the increased deduction instead of the standard deduction. Don’t forget: Taxpayers who take the standard deduction can still take advantage of the $300 or $600 additional charitable contribution deduction in 2021.
  • Give appreciated property instead of cash. This allows the taxpayer to deduct the higher FMV of the gift, while not having to claim income for the gain on the sale of the property. See the example in Table 3.

Table 3. Appreciated property gift example

Taxpayer owns stock with an FMV of $10,000 and a basis of $6,000.

Assume a 15% capital gains tax rate and a 20% income tax rate.

 

 

Option A:

Sell stock and donate cash

Option B:

Donate stock

Long-term capital gains

$4,000

$0

Tax on long-term capital gains

$600

$0

Charitable contribution

Cash $9,400

Stock $10,000

Charitable contribution tax savings

$1,880

$2,000

Net tax deduction

$1,280

($1,880 savings – $600 tax)

$2,000

Deduction options for benevolent taxpayers have expanded for the 2021 tax year. Now, taxpayers who do not itemize can receive a tax benefit for gifts to charitable organizations. In addition, the AGI limitations on cash deductions for itemized deduction purposes is increased to 100%. Keep in mind the changing tax laws and best practices when advising your tax clients concerning charitable contributions.

Helpful links:
Keep reading the Becker blog for more important tax updates that all tax professionals, accountants and CPAs should be in-the-know of.

The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.

Need a refresher on tax law changes in 2021? Head to Becker’s Tax Resource Center for helpful news and tax resources to prepare yourself for the new tax season.

 

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