Do You Know the Rules on Charitable Deductions for Income Tax?

Since the enactment of the federal Tax Cuts and Jobs Act (TCJA) in 2017, fewer people have been itemizing charitable deductions on their income tax. The TCJA nearly doubled the standard deduction available to taxpayers, making it less burdensome for many to simply take the standard deduction than to itemize such things charitable donations in an effort to reach a higher deduction amount.

Those who still itemize donations because it makes better financial sense for them may do so because they have significant charitable donations. Those taxpayers need to be aware of the limitations on deductions for various types of property donated to various types of organizations. In other words, not all charitable donations are created equal for the purposes of income tax deductions.

The CARES Act and Charitable Donations

When the TCJA offered a higher standard deduction without the need to make charitable donations, such donations, predictably, declined. Then along came Covid-19, plunging many Americans into dire financial straits. Charities were stressed by both greater public need and fewer donations. Accordingly, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 created a greater incentive for giving.

Under the CARES ACT, taxpayers who do not itemize their deductions and instead take the standard deduction can still take a charitable deduction of up to $300 for cash contributions made to qualifying organizations in 2020. Qualifying organizations for the purposes of this deduction include those that are religious, charitable, educational, scientific, or literary in purpose.

In addition to that extra charitable deduction, the CARES Act also suspended limits on certain other types of charitable contributions.

Itemizing Charitable Deductions Under the CARES Act

As a general rule, treatment is more favorable for public charities than for private foundations, and for cash donations than for donations of other types of property.

For those who itemize, the charitable deduction limit may be restricted based on the type of property donated, the taxpayer’s circumstances, and how the IRS classifies the charity receiving the donation. As a general rule, treatment is more favorable for public charities than for private foundations, and for cash donations than for donations of other types of property. (That said, non-cash gifts may offer other advantages, such as helping the taxpayer avoid capital gains tax.)

If a taxpayer is donating to a public charity, donor-advised funds, or supporting organization, in tax years other than 2020 they may deduct a cash gift of up to 60% of their contribution base. The “contribution base” is generally equivalent to the donor’s adjusted gross income (AGI). For gifts of long-term capital gain property, donors may deduct the fair market value of the donation up to 30% of the donor’s contribution base, in addition to avoiding any capital gains tax that would otherwise have been due on the appreciated assets. For gifts of short-term capital gain property, taxpayers may deduct up to 50% of the contribution base (along with avoiding capital gains tax). The difference between long-term and short-term capital gain is whether the asset was held for more than a year (long-term) or one year or less (short-term).

For gifts to private foundations, the rule has been that a taxpayer may deduct a cash donation of up to 30% of their contribution base. Qualified appreciated stock is deductible based on its fair market value up to 20% of the contribution base. In order to be considered “qualified appreciated stock,” stock quotes must be available on an established securities market, and the stock must have been held for more than a year.

Other long-term capital gain property (other than qualified appreciated stock) donated to a private foundation may be deducted at fair market value up to 20% of the donor’s contribution base. Remember that donations of qualified appreciated stock and other long-term capital gain property to even a private foundation allows the donor to avoid capital gains tax on the appreciation.

Under the CARES Act, the only change to the rules above is that for tax year 2020, cash donations to a public charity may be deducted up to 100% of the donor’s contribution base. (Cash donations to donor-advised funds and supporting organizations remain deductible at 60% of the contribution base; many charitable givers are urging that donations to these organizations be given the same favorable tax treatment as donations to public charities.)

In essence, the charitable deduction limit under the CARES Act is designed to promote an influx of cash to public charities that have been hit hard by the pandemic, and that are working harder than ever to serve the needs of their communities. Many in the charitable planning community are working to secure the same tax benefits for other types of charitable donations. Given that the pandemic wears on, they are also lobbying for extension of favorable tax treatment of charitable donations under the CARES Act.

The CARES Act provisions have been extended through the Consolidations Appropriations Act for tax year 2021.

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