How often have you heard of a Tax Provision being “Taxpayer Friendly”?
Few times, you say. Well, here’s one that may be beneficial to all taxpayers, but has not had the media coverage that it deserves… It’s not too late, so read on…
Temporary tax changes through the end of 2021 under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA of 2020) (a Division EE of the 2021 Consolidated Appropriations Act (CAA) signed into law on December 27, 2020):
1. Charitable Contribution Deduction for Non-Itemizers:
It has always been the case that taxpayers who take the standard deduction and do not itemize, cannot deduct their charitable contributions.
Not so for the 2021 tax year… The Taxpayer Certainty and Disaster Tax Relief Act of 2020 allows taxpayers who do not itemize their deductions to claim a limited deduction on their 2021 federal income tax returns.
Taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 on their 2021 federal income tax returns for cash contributions to certain qualifying charities during 2021. The maximum deduction is $600 for married individuals filing joint returns.
A 50% accuracy-related penalty is applied to underpayments attributable to any overstated cash contribution.
2. Charitable Contribution Deduction for Itemizers:
Taxpayers who itemize can generally claim a deduction for charitable contributions to qualifying organizations limited to 20% to 60% of their adjusted gross income (AGI) and varies depending on the type of contribution and the type of charity.
Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the suspension of the 60% limit for tax year 2020, was extended to 2021.
Consequently, taxpayers who itemize in 2021, may apply up to 100% of their AGI, for calendar-year 2021 cash contributions to qualifying charitable organizations.
The 100% limit is not automatic; the taxpayer must choose to take the new limit for any qualified cash contribution. Otherwise, the usual limit applies. The taxpayer’s other allowed charitable contribution deductions reduce the maximum amount allowed under this election. Eligible individuals must make their elections on their 2021 Form 1040 or Form 1040-SR.
Taxpayers may carry forward any excess charitable contributions for 5 years, but the enhanced deduction limit of 100% of AGI expires after 2021!
3. Corporate limit increased to 25% of taxable income:
The law now permits C corporations a deduction up to 25% of their taxable income, for charitable cash contributions made to eligible charities during calendar year 2021 (increased from 10%).
The increased limit is not automatic. C corporations must choose the increased corporate limit on a contribution-by-contribution basis.
4. Increased limits on amounts deductible by businesses for certain donated food inventory:
Businesses donating food inventory that are eligible for the existing enhanced deduction may qualify for increased deduction limits.
For contributions made in 2021, the limit is increased to 25%.
For C corporations, the 25% limit is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their total net income for the year. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.
Cash contributions for the purpose of the temporary 2021 changes noted above, does not include those:
- Made to a supporting organization
- Intended to help establish or maintain a donor advised fund (DAF)
- Carried forward from prior years
- Made to most private foundations
- Made to charitable remainder trusts
Cash contributions include those made by check, credit card or debit card as well as unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization.
Charitable contribution considerations play a key role in tax planning strategies that may assist in maximizing your giving impact!
** If you had extended your 2020 IRS Income Tax Return, remember to file it by Friday, October 15, 2021, to avoid late filing penalty. Certain taxpayers may have more time to file:
- Members of the military and others serving in a combat zone; and
- Taxpayers living or with a business in a federally declared disaster area who already had a valid extension in place.
If you have any questions, please contact your HM&M advisor.
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