Understanding the 2021 Charitable Contributions Deduction
What Can You Claim?
If you’re currently going through the process of preparing your 2020 tax return, then you may have heard about the charitable contributions deduction that North Bay individuals can claim for 2020.
In an effort to encourage Americans to donate to charities that were suffering more acutely during the COVID-19 pandemic, Congress passed new, temporary tax provisions that allow all taxpayers to deduct up to $300 for charitable contributions on their taxes, even if they choose not to itemize their deductions.
But did you know that Congress recently extended and increased these provisions for 2021?
As you plan your finances for the rest of the year, here’s an overview of everything you need to know about the 2021 charitable contributions deduction, from Georgia Rogers, a North Bay tax professional, an IRS Enrolled Agent and the owner of ProActive Tax Solutions.
How Does This Provision Differ from Previous Tax Laws?
With the increase in the standard deduction and $10,000 limit on taxes, many taxpayers do not benefit from itemizing deductions.
Because of this, many individuals were previously not receiving any tax benefits from their charitable contributions. In 2020, Congress passed the CARES Act, which temporarily changed this policy to help encourage people to give more money to charity.
For 2020 taxes, taxpayers who claim the standard deduction can make an above-the-line deduction (also known as an Adjustment to Income) for cash contributions of up to $300.
And for those who do itemize their deductions, the maximum deduction for cash contributions was increased to up to 100% of your Adjusted Gross Income, instead of the previous 60% limit.
These changes were only meant to apply to the year 2020, but since COVID-19 is still affecting Americans and the economy, Congress passed an additional 2020 Taxpayer Certainty and Disaster Relief Act in December.
This new act not only extended some of the tax changes into 2021, but it also expanded the deduction in several key ways and introduced new penalties for inaccuracies.
Changes to Itemized Deductions for 2021 That Marin Residents Need to Know About
If you plan to claim itemized deductions for 2021, then the increased deduction limit will be the same as it was in 2020. You can deduct up to 100% of your AGI for cash contributions.
Charitable Contributions Deduction for Non-Itemizers in 2021
For people who take the standard deduction in 2021, the provision allowing you to deduct up to $300 for cash contributions will still be applicable.
One important change to note is that if you file jointly as a married couple, you can now deduct up to $600 for cash contributions, whereas in 2020 the deduction was limited to $300 no matter your filing status.
The second major change for non-itemizers has to do with how the deduction is calculated. In 2020, the cash contributions were deducted when computing adjusted gross income. Since some tax benefits are limited by your AGI, this meant that some people might actually miss out on other benefits if they claimed the cash contribution deduction.
In 2021, the cash contributions will be deducted after your AGI is calculated, so more people should be able to take advantage of the deduction and save money in the process.
We highly recommend consulting with an experienced Marin based tax professional such as our team at ProActive Tax Solutions so that you can better understand the implications of these changes for your unique tax situation.
If you’re unsure of whether you should itemize your deductions or claim the standard deduction, we can also help you determine the best course of action that will give you a higher tax return.
What Types of Contributions Can Be Deducted?
In order to meet the criteria for a cash contribution that can be deducted, you have to have given the money to a qualified charitable organization, which you paid by cash, check, electronic funds transfer or credit card.
Qualified charitable organizations are groups like churches, nonprofit schools, veterans’ groups and other not-for-profit organizations that have been granted tax-exempt status by the Internal Revenue Service and are eligible to receive tax-deductible charitable contributions.
To find out if an organization counts as a qualified charitable organization, you can look them up on the IRS Tax Exempt Organization Search, or consult with a tax professional.
Keep in mind that contributions to new or existing donor-advised funds or private foundations do not qualify as a cash contribution for non-itemizers in 2020 or in 2021.
What Will Happen If I Claim an Inaccurate Amount for the Charitable Contributions Deduction?
It’s extremely important to make sure that your charitable contributions deductions are claimed accurately, because the new tax provisions have also increased the accuracy-related tax penalty for non-itemizers in 2021. In the past, if you underpaid your taxes, you could be charged a penalty that equalled 20% of the amount you underpaid.
In 2021, if you improperly claim the charitable contributions deduction and it causes you to underpay, you could be charged a penalty of 50% of the amount you underpaid.
To avoid paying this new, higher penalty, you should work with a tax professional to help ensure that your return is completely accurate. If you work with us, you can have peace of mind knowing that you’re hiring an experienced professional who is also qualified to represent you in front of both Federal and California State tax agencies if you happen to be audited.
What Documentation Is Needed for Charitable Contributions?
When you hire us to handle your tax preparation, we can also help you make sure that you have the proper documentation that the IRS requires in order to deduct a cash contribution.
Having everything properly documented can decrease your likelihood of getting audited and simplify the process in case an audit should occur.
No matter how small the deduction, you cannot deduct a cash contribution without being able to document it with one of the following records:
- A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. This record could be in the form of a canceled check, a bank or credit union statement, or a credit card statement.
- A receipt, letter, or other form of written communication from the qualified charitable organization you donated to. This must show the name of the organization and the date and amount of the contribution.
- Payroll deduction records that include a pay stub that shows the contribution and a pledge card that shows the name of the qualified charitable organization. If your employer withheld $250 or more from a single paycheck, your documentation must also include a statement that says the organization does not provide goods or services in return for any contribution made by payroll deduction.
If you plan to deduct a contribution of $250 or more, you must also provide written acknowledgement from the qualified charitable organization. This needs to include the amount of the contribution and a statement of whether or not the qualified organization gave you goods or services as a result of the contribution. This does not include token items or membership benefits.
If a qualified organization did give you goods or services in exchange for a contribution of $250 or more, they must provide a good-faith estimate of the value of those goods or services. This does not include intangible religious benefits. If the only benefit you received was an intangible religious benefit, then the qualified organization should provide a statement confirming that.
Hire a North Bay Tax Accountant to Help You Navigate These Changes
As you prepare to file your tax returns for 2020 and 2021, it can be extremely overwhelming to try to stay up-to-date with all of these changes to the tax code. Additionally, it can be difficult to know whether you should file itemized deductions or take the standard deduction, and with these new charitable contributions provisions, that decision is even more complicated than normal.
When you work with a tax professional, you’re not only protecting yourself from making mistakes on your tax return, but you can also save yourself from hours of working on your taxes and significantly reduce your stress around the whole process. When you hire ProActive Tax Solutions, your tax return will be personal overseen by Georgia Rogers, E.A., an IRS Enrolled Agent with 25 years of tax preparation experience.
We may even be able to save you money by helping you take full advantage of the charitable contributions deduction and other tax breaks you may not know about. There’s a reason why we’re one of the most trusted tax preparers in the North Bay.
Our Corte Madera tax preparation office is right off the 101, and you can get a free consultation with Georgia by calling (415) 924-6240. Call now to get started!