The arrival of the holiday season is when many people think about how they can give back. Often taxpayers want to donate to a charity. This year, the new “universal” deduction makes it easier for people to receive a tax benefit for giving. Because the deduction is taken “above the line,” it reduces, by up to $300, your adjusted gross income — an important number because it determines your eligibility for tax credits and other deductions.
Here’s how the CARES Act changes deducting charitable contributions made in 2020:
Previously, charitable contributions could only be deducted if taxpayers itemized their deductions.
However, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations. For the purposes of this deduction, qualifying organizations are those that are religious, charitable, educational, scientific or literary in purpose. The law changed in this area due to the Coronavirus Aid, Relief, and Economic Security Act.
The CARES Act also temporarily suspends limits on charitable contributions and temporarily increases limits on contributions of food inventory. More information about these changes is available on IRS.gov.
Is the $300 universal deduction in the CARES Act permanent?
The deduction is temporary, for tax year 2020 only, said Cari Weston, director of tax practice and ethics at the American Institute of C.P.A.s. (Congress sometimes extends temporary tax provisions, and nonprofit organizations would like to see that happen, so stay tuned.)
Temporary Increase in Limits on Contributions of Food Inventory
There is a special rule allowing enhanced deductions by businesses for contributions of food inventory for the care of the ill, needy or infants. The amount of charitable contributions of food inventory a business taxpayer can deduct under this rule is limited to a percentage (usually 15 percent) of the taxpayer’s aggregate net income or taxable income. For contributions of food inventory in 2020, business taxpayers may deduct qualified contributions of up to 25 percent of their aggregate net income from all trades or businesses from which the contributions were made or up to 25 percent of their taxable income.
You may deduct a charitable contribution made to, or for the use of, any of the following organizations that otherwise are qualified under section 170(c) of the Internal Revenue Code:
- A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia, if made exclusively for public purposes;
- A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals;
- A church, synagogue, or other religious organization;
- A war veterans’ organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions;
- A nonprofit volunteer fire company;
- A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services);
- A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes;
- A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt. **Users can also download complete lists of organizations eligible to receive deductible contributions, auto-revoked organizations and e-Postcard filers using links on the Tax Exempt Organization Search page of IRS.gov.
Timing of Contributions
Contributions must actually be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method.
If you donate property other than cash to a qualified organization, you may generally deduct the fair market value of the property. If the property has appreciated in value, however, some adjustments may have to be made.
The rules relating to how to determine fair market value are discussed in Publication 561 , Determining the Value of Donated Property.
Limitations on Deductions
In general, contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income computed without regard to net operating loss carrybacks. Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent adjusted gross income (computed without regard to net operating loss carrybacks), however. Tax Exempt Organization Search uses deductibility status codes to indicate these limitations.
The 50 percent limitation applies to (1) all public charities (code PC), (2) all private operating foundations (code POF), (3) certain private foundations that distribute the contributions they receive to public charities and private operating foundations within 2-1/2 months following the year of receipt, and (4) certain private foundations the contributions to which are pooled in a common fund and the income and corpus of which are paid to public charities.
The 30 percent limitation applies to private foundations (code PF), other than those previously mentioned that qualify for a 50 percent limitation, and to other organizations described in section 170(c) that do not qualify for the 50 percent limitation, such as domestic fraternal societies (code LODGE).
A special limitation applies to certain gifts of long-term capital gain property. A discussion of that special limitation may be found in Publication 526 , Charitable Contributions.
Keep your records
If you expect to take a write-off for the cash you’re giving to your favorite charity, make sure you retain any acknowledgement letters or receipts you get in return. In an age when people use their credit cards to donate to their favorite charities, the “thank you” email you get from the organization is proof of your donation. Print out that document or save the e-mail. You’ll need it when you file your taxes next spring.
The special $300 tax deduction for 2020 was made to help charities as well as taxpayers. “Our nation’s charities are struggling to help those suffering from COVID-19, and many deserving organizations can use all the help they can get,” IRS Commissioner Chuck Rettig said in a statement. “We encourage people to explore this option to help deserving tax-exempt organizations — and the people and causes they serve.”