Most taxpayers understand that to receive the benefit of charitable deductions, they need to itemize their income tax deductions. However, in the wake of the pandemic, Congress passed legislation allowing even those who take the standard income tax deduction to benefit from a charitable income tax deduction.
As this year ends and you plan for the next, it’s a great time to tie up loose ends and position yourself in the best way possible for your individual income taxes for the tax year 2021. Certain tax benefits end on December 31, 2021, so it’s important to take advantage of as many of those provisions as possible to lower your overall tax bill. One of the ways that you can do that is by making gifts to a charity. Normally, only folks who itemize their deductions have the option to deduct from income the amounts given as charitable donations. Thus, if a taxpayer normally takes the standard deduction, that taxpayer misses out on the income tax benefits of donating to charity. For example, donating cash entitles you to a current income tax deduction for the donation, up to 60% of your adjusted gross income if you donate to a qualified public charity. If the donation exceeds 60% of your adjusted gross income, you can carry the deduction forward for up to five years. This simple and straightforward method allows you to make an impact by simply writing a check; however, you only receive the benefit of the charitable income tax deduction if you plan to itemize your deductions.
A special provision included in the Coronavirus Aid Relief and Economic Security (“CARES”) Act and subsequently extended by the Taxpayer Certainty Disaster Relief Act of 2020 allows anyone who contributes to charity to deduct up to $300 for donations to a qualifying charity on their 2021 federal income tax return. This provision applies even if the taxpayer takes the standard deduction, rather than itemizing. A married couple filing jointly can deduct up to $600. Donations made by cash, check, credit card, and debit card all qualify, as do amounts incurred for unreimbursed out-of-pocket expenses by an individual volunteer in connection with their services to the charity. Unfortunately, the value of volunteer service itself, securities, household items, and other property will not qualify for purposes of this deduction. Most taxpayers take the standard deduction rather than itemizing their deductions because it produces a better result for them. Thus, while this benefit may seem minor, it affects most taxpayers and allows a charitable deduction where otherwise none would exist. This provision expires with the tax year ending on December 31, 2021.
Donations from a taxpayer to a supporting organization, Donor Advised Fund (“DAF”), Private Foundation, or to a Charitable Remainder Trust (“CRT”) will not qualify for this deduction. Taxpayers who make donations in any of these ways would take these charitable deductions as itemized deductions as noted above. A supporting organization is a charity that accomplishes its exempt purposes by supporting other exempt organizations, usually public charities. The DAF is an account maintained by a charity that allows the donor to advise on how to distribute or invest amounts contributed by the donor held in the fund. A Private Foundation is a trust or corporation dedicated to achieving a charitable mission created by a single individual, family, or corporation. A CRT is a trust in which the donor keeps annuity or unitrust payments for a term of years or life and gives the remainder interest to a charity. As discussed, donations made to any of these entities will not qualify for the special charitable deduction under the CARES Act. Rather, individuals making these gifts need to itemize their deductions to receive a charitable income tax deduction. The foregoing charitable opportunities present just a few of the myriad ways in which a taxpayer can remove the assets, as well as the appreciation on those assets, from their taxable estate and obtain an income tax charitable deduction. If you want to consider charitable contributions of this nature, you should consult with an Estate Planning Attorney before the end of the year to determine how best to accomplish this and the benefits that these larger charitable deductions can bring.
Likewise, taxpayers wishing to take advantage of the expiring deduction under the CARES Act need to act fast. First, they should ensure that the organization to which they wish to donate is properly qualified as a charity. An individual can use the “Tax Exempt Organization Search Tool” (https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations) to confirm the entity’s status. Second, the taxpayer should keep good records, which may include obtaining a letter of acknowledgment from the charity and retaining a receipt evidencing the transaction such as a canceled check, or credit card receipt. If a taxpayer wants to review requirements for substantiating gifts to charity, Publication 526, Charitable Contributions provides that information.
Year-end presents a wonderful time to consider these and other estate planning issues. Charitable contributions present an excellent opportunity to give by doing a little good for the community and to receive an income tax charitable deduction for your efforts. Several communities still feel the effects of the pandemic and need our help now more than ever. A qualified Estate Planning Attorney can help you explore your charitable opportunities in more detail and discuss other year-end estate planning opportunities.
Tereina Stidd, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
- The Not-So Transparent Corporate Transparency Act - March 15, 2023
- The View from Heckerling - March 8, 2023
- What You Need to Know About SECURE Act 2.0 - March 1, 2023