The CARES Act opened the door to generous provisions for donors to take advantage of tax benefits for charitable giving specific to 2021. Now is the time to communicate with your donors about these benefits and encourage year-end giving. The following will go over a few of the rules of the changes and provide sample language that can be used to contact supporters.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), was signed into law on Friday, March 27, 2020, for relief from the impacts of COVID-19. Although the CARES Act was economic assistance for American workers and families through various stimulus benefits, the CARES Act also changed the tax benefits for charitable giving for 2021 with the bill’s extension on December 27, 2020.
Reminding donors before December 31, 2021, of these benefits in charitable giving should be done as soon as possible to encourage giving and allow donors to maximize the tax benefits of charitable giving when needed the most by the charitable organization.
The types of charitable giving we are referring to are cash donations to qualifying charitable organizations such as 501(c)(3) public charities. Other types of non-cash donations that include donations of real estate or marketable securities, contributions to donor-advised funds, conservation easement, or private foundations have other limits/restrictions that can apply and will not be addressed in this newsletter.
What are the key provisions that affect 2021 under the CARES Act?
For taxpayers that itemize:
For the first time, donors who itemize their deductions can now deduct charitable contributions up to 100% of adjusted gross income (AGI). This change allows donors to maximize donations in a single year and have more control over the impact of contributions on taxable income. Previously, this limit was at 60% of AGI. Giving beyond the 100% limitation may be carried over and used in the following five years.
How does the CARES Act impact those that do not itemize?
Taxpayers who generally do not itemize on their return can take a charitable deduction of up to $300 (single/separately) / $600 (married filing jointly) for cash contributions to qualifying organizations on their return. This deduction will be an “above the line” deduction and the maximum is $300/$600 based on filing status.
What about gifts from an IRA?
Under the CARES Act, taxpayers younger than 72 could opt out of receiving most of their required minimum distributions (RMDs) from IRAs and retirement plans. However, it is important to note donors aged 70½ or older can still make a qualified charitable distribution (QCD, or IRA charitable rollover) of up to $100,000. This benefit may have been minimized if donors elected to quit taking their RMDs, however, the benefit of using a QCD to satisfy an RMD requirement remains a way to make tax-advantageous gifts, specifically if the donor does not itemize deductions. Another advantage is that a QCD keeps the income out of the taxpayer’s gross income which can impact the effective tax rate and limitations of other deductions.
What about Corporate Giving?
The CARES Act did change the rules for corporate giving as well and increased the cap on how much corporations may deduct from 10 percent of taxable income to 25 percent. Although many corporations have been negatively impacted by COVID-19 in 2020 and 2021, others have been able to maintain positive cash flow and may benefit from increased giving.
Sample language for communication with donors:
- Now that we are approaching the end of 2021, have you made the most of your charitable giving to take advantage of a few changes for charitable giving under the CARES Act?
- We have heard a lot about the CARES Act as a stimulus package but keep in mind the changes in the charitable giving rules for 2021 that can have a positive impact on charitable giving by using these rules to get the most tax savings.
- The CARES Act has something for all individual taxpayers in allowing those that do not itemize a $300 (single separately) / $600 (married filing jointly) “above the line” deduction for cash donations to qualifying organizations in addition to increasing the limit of charitable contributions from 60% of adjusted gross income (AGI) to 100% of AGI for those that itemize. This limit allows donors more control over their taxable income. Carryover rules still apply for contributions above the allowed limit.
- The CARES Act may have changed the benefits of the qualified charitable distribution (QCD) but the benefits of a direct rollover contribution from retirement plans/IRA’s still apply and benefits both taxpayers that can and cannot itemize.
- Corporate charitable giving has typically had a 10% limit based on taxable income, but for 2021 that limit was increased to 25%.
As a reminder, be sure to follow the guidelines and requirements for acknowledging charitable donation including the language “no goods or services provided” statement if that applies.
It is always a good idea for donors to check with their tax advisors to understand how the CARES Act rules apply to their specific situation. If you have any questions regarding the CARES Act changes for charitable contributions, please contact the Anderson ZurMuehlen Non-Profit Specialty Team.
This article was written by Kendra Moran, CPA and Shareholder in our Billings office.