In a recent informational release, the IRS reminded individuals that a special tax provision allows more individuals to deduct on their 2021 federal income tax returns up to $600 in cash donations to qualifying charities. This column details the specifics of this deduction and how it is claimed on an individual’s federal income tax return.
Included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (enacted into law in March 2020) a more limited version of this tax deduction applied only to tax year 2020. But the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (enacted in December 2020) extended the tax deduction to tax year 2021.
It is important to explain the significance of this tax deduction available only to those federal income tax filers who use the standard deduction rather than itemizing their deductions (filing Schedule A on their federal income tax returns). It is interesting to note that mainly as a result of the passage of Tax Cuts and Jobs Act of 2017, 9 in 10 individuals currently take the standard deduction rather than itemizing and therefore could potentially benefit by using this charitable donation deduction.
Under this provision, individual tax filers filing as single, head of household, or married individuals filing separate returns, can claim a deduction of up to $300 for cash/check/credit card/debit card contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married individuals filing joint returns.
Charitable contributions include those contributions made in cash, by check, credit card or debit card, as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with their volunteer services to a qualifying charitable organization. Charitable contributions for the purpose of this deduction do not include the value of volunteer services, investment capital assets including stocks and bonds, or household items donated to a qualifying charity. The following examples illustrate:
Example 1. Paul and Martha are married and use the standard deduction when filing their federal income tax return. They are active church members. Church dues are $600. The church accepts donations of investment capital assets such as stocks for payment of dues. Paul and Martha own 10 shares of ABC stock, currently worth $900. They could donate the ABC stock to the church and fulfill their 2021 church dues obligation. But in so doing, Paul and Martha will receive no charitable tax deduction since they do not itemize on their federal income tax return.
But if Paul and Martha sell their ABC stock, then the net cash proceeds can be donated to the church and Paul and Martha can include up to $600 as a charitable deduction on their 2021 federal income tax return.
Example 2. Sheila is single. She is retired and volunteers twice a week at an American Rd Cross blood donation center. On her way to the blood donation center, Sheila goes to Costco and buys bottled water, orange juice cans and cookies that the blood donors drink and eat after their blood donations. Sheila is not reimbursed by the Red Cross for her Costco purchases. She is therefore able to deduct up to $300 of her purchases as a qualifying charitable contribution.
Individuals who are making cash/check/credit card/debit card donations are reminded by the IRS to make sure that they are donating to a qualified charitable organization. This is because in general in order to receive a charitable donation tax deduction, a donor can donate only to a qualified charity. To check the status of a charity as a qualified charitable organization, individuals should use the IRS “Tax Exempt Organization” search tool available for download on the IRS web site at https://apps.irs.gov/app/eos/.
Cash, check, credit card, and debit card contributions to most charitable organizations qualify. But contributions made to a donor-advised fund (DAF) do not qualify as a charitable donation. Any charitable contribution carried forward from prior tax years will not qualify as a $300/$600 charitable contribution for the 2021 tax year. Contributions made to most private foundations and most cash contributions made to charitable remainder trusts do not qualify as a charitable donation.
For federal employees, one organization that qualifies as a cash/check charitable donation is the Combined Federal Campaign (CFC). Employees typically make their donations to the CFC via payroll deduction in which they elect to have a certain dollar amount deducted from their paycheck and sent to the CFC. Those employees who gave to the CFC during 2021 (either bi-weekly or through a one-time donation) are eligible to count their donations towards their 2021 cash/check charitable contribution.
As with all potential charitable contribution deductions, special record keeping rules apply to the $300/$600 charitable contribution deduction. Usually, this record keeping includes obtaining an acknowledgement letter form the charity before filing a tax return and retaining a cancelled check or credit card receipt for contributions of cash. Details on the recordkeeping rules for substantial gifts to charity can be found in IRS Publication 526, (Charitable Contributions) available for download on the IRS website here.
Those individuals who do not itemize on their 2021 federal income tax return (they do not file Schedule A) and qualify for the $300/$600 charitable contribution deduction enter the amount of their donations on IRS Form 1040, line 12b, as shown below. No more than $300 (for single/head of household/married filing separately filers) or $600 (for married filing joint filers) can be entered on line 12b.
The total of the standard deduction (which depends on an individual’s filing status – single, head of household, married filing separate or married filing joint (and whether an individual is age 65 or older and/or blind) entered on line 12a is added to the allowable charitable contribution on line 12b ($300 or $600) and entered on line 12c, as shown below.