Expanded Tax Benefits for Charitable Contributions During 2021
Individuals & Businesses Who Donate to Charity Can Benefit From COVID-Related Tax Breaks

If you donate cash to a qualifying charitable organization during 2021, you may be able to take advantage of newly expanded tax benefits.

These tax breaks are brought to you by the Coronavirus, Aid, Relief, and Economic Security (CARES) Act, which created several provisions to help individuals and businesses who donate to charity – as well as the Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) of 2020, which extended four temporary tax changes that were originally enacted by the CARES Act.

The IRS offers the following guidance about these tax breaks for charitable contributions.

Tax Deduction for Cash Donations Up to $600 – For Individuals Who Don't Itemize

When you are preparing your annual income tax return (Form 1040 or Form 1040-SR), you are usually required to choose between claiming the standard deduction and itemizing your deductions. Ordinarily, this means that individuals who elect to take the standard deduction cannot claim a tax deduction for charitable cash donations. However, the law now permits these individuals to claim a limited tax deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations.

According to the IRS, nearly 9 out of 10 taxpayers now take the standard deduction and could potentially qualify to claim this limited deduction for cash contributions. These individuals (including married individuals filing separate returns) can claim a tax deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction amount is increased to $600 for married individuals filing joint returns.

Cash contributions include donations made by check, credit card, or debit card – as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with the individual's volunteer services to a qualifying charitable organization. Cash contributions do not include the value of volunteer services, securities, household items, or other property.

Cash donations to most charitable organizations qualify. However, cash contributions made either to supporting organizations or to establish or maintain a donor-advised fund do not qualify. (A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities. A donor-advised fund is generally a fund or account maintained by a charity in which a donor can, because of being a donor, advise the fund on how to distribute or invest amounts contributed by the donor and held in the fund.) Cash contributions carried forward from prior years do not qualify, nor do cash contributions to most private foundations and most cash donations to charitable remainder trusts.

100% Limit on Cash Donations – For Individuals Who Itemize

Individuals who itemize can generally claim a tax deduction for charitable contributions that they made to qualifying charitable organizations, although this is subject to certain limits. These limits typically range from 20% to 60% of the taxpayer's Adjusted Gross Income (AGI), and the limits vary by the type of contribution and type of charitable organization. For example, a cash contribution made by an individual to a qualifying public charity is generally limited to 60% of the individual's AGI. Excess contributions may be carried forward for up to 5 tax years.

The law now permits electing individuals to apply an increased limit (a.k.a. "Increased Individual Limit"), up to 100% of their AGI, for qualified contributions made during calendar year 2021. Qualified contributions are donations made in cash to qualifying charitable organizations.

Cash donations to most charitable organizations are eligible for this tax deduction – but certain cash contributions do not qualify, including donations made either to supporting organizations or to establish or maintain a donor-advised fund. Additionally, cash contributions to private foundations and most cash contributions to charitable remainder trusts do not qualify.

The IRS reminds taxpayers that, unless an individual makes the election for any given qualified cash contribution, the usual percentage limit applies. Keep in mind that an individual's other allowed charitable contribution deductions reduce the maximum amount allowed under this election. Eligible individuals must make their elections with their 2021 Form 1040 or Form 1040-SR.

25% Limit on Cash Donations for Corporations

There is also a temporary increase to the maximum allowable deduction limit for cash contributions of up to 25% of a corporation's taxable income. The law permits C corporations to apply the increased limit (a.k.a. “Increased Corporate Limit”) of 25% of taxable income for charitable cash contributions that are made to eligible charities during calendar year 2021. Normally, the maximum allowable deduction is limited to 10% of a corporation's taxable income.

It's important to note that the Increased Corporate Limit does not automatically apply. C corporations must elect the Increased Corporate Limit on a contribution-by-contribution basis.

100% Limit for Corporate Disaster Relief Contributions

The Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) of 2020 temporarily increased the limit for cash contributions for relief efforts in qualified disaster areas to up to 100% of a corporation's taxable income. A “qualified disaster area” is a place where a major disaster has been declared under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

Contributions paid in cash to most charitable organizations will qualify for this temporary increased limit. The contributions must be paid by the corporation between January 1, 2020 and February 25, 2021 in order to be eligible.

Corporations are expected to meet the typical recordkeeping requirements for charitable contributions, which includes obtaining a Contemporaneous Written Acknowledgement (CWA) from the charity.

25% Limit on Food Donations for Businesses

Businesses donating food inventory that are eligible for the existing enhanced tax deduction (for contributions for the care of the ill, needy, and infants) may qualify for increased deduction limits. For contributions made in 2021, the limit for these contribution deductions is increased from 15% 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 aggregate net income for the year from all trades or businesses from which the contributions are made. A special method for computing the enhanced tax deduction continues to apply, as do food quality standards and other requirements.

Recordkeeping Rules & Tips

The IRS reminds individuals and businesses that special recordkeeping rules apply to any taxpayer claiming a tax deduction for charitable contributions. Usually, this includes obtaining an acknowledgment letter from the charity before filing a tax return and retaining a cancelled check or credit card receipt for cash contributions. For donations of property, additional recordkeeping rules apply.

For more information about the tax benefits and implications of donating to charities, please refer to IRS Publication 526: Charitable Contributions.