Charitable Giving Incentives – Recent Developments

As we know, the CARES Act provided temporary tax relief and charitable giving benefits in response to the impacts of COVID. New legislation passed late last year extended some benefits into 2021. Stay tuned for likely additional stimulus legislation this year but here’s what has happened so far.

On December 28, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA contains both the COVID-Related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR). 

While the CAA did not offer anything new regarding charitable giving, it extended and clarified two provisions from the 2020 CARES Act.

First, the $300 above-the-line deduction for charitable gifts was extended for 2021 and the CAA specified that married couples filing jointly can deduct $600 ($300 each) in 2021, unlike 2020 where the deduction was limited to $300 per taxpaying unit.  This allows donors to reduce their income prior to the calculation of their adjusted gross income even if they don’t itemize.

Accompanying the extension and expansion of this deduction is an increase in penalties for an overstatement of the claimed deductible amount. Applicable only in 2021, a taxpayer who overstates the amount he is permitted to claim as a deduction will be subject to an accuracy related penalty equal to 50% of the amount by which the overstated deduction reduces the donor’s tax liability.

Second, the CAA also extended into 2021 the taxpayer’s ability to elect to claim a charitable deduction of up to 100% of their adjusted gross income, which is normally limited to just 60%. The CAA also extended the CARES Act’s allowance of increased charitable income tax deduction limitations for corporate tax filers.  Corporations may deduct 25% of their taxable income in 2021, which is up from the usual 10% limit.

For both the above-the-line deduction and the election to deduct 100% of income, the same limitations and rules apply. Namely, the provision only applies to cash donations to qualified public charities and so would not apply to donations made to donor advised funds or supporting organizations.

Finally, we should note that the waiver of the requirement that folks over the age of 70½ take their required minimum distribution from individual retirement accounts was not extended into 2021. While this may not have a direct impact on a donor’s decision to make a qualified charitable distribution to their favorite nonprofit, it will again make this option more attractive for tax planning purposes.