By Julie Jason, originally posted on Forbes.com.
There are only a few days left before the end of the year to make charitable contributions for 2021. If you are like most taxpayers (an estimated nine out of 10, according to the IRS) who take the standard deduction as opposed to itemizing charitable contributions, there are important reminders.
As in all cases, be sure to run everything by your tax adviser before taking any action. Taxes are unique to the individual.
No Need To Itemize
If you don’t normally itemize tax deductions, you may believe that you cannot get a deduction for charity. That’s not the case. For 2021, you can deduct up to $300 for cash contributions to qualifying charities ($600 for married couples filing jointly). For more information, see “Expanded tax benefits help individuals and businesses give to charity in 2021” at the IRS website.
The ability to take a charitable deduction without itemizing is a temporary tax change that began with 2020 tax returns (thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was enacted in March 2020). The Consolidated Appropriations Act, 2021 extended the change for 2021.
IRS Contribution Guidelines
According to the IRS, cash contributions “include those made by check, credit card or debit card as well as amounts incurred for unreimbursed out-of-pocket expenses in connection with the individual's volunteer services to a qualifying charitable organization.”
Most charitable organizations qualify for the contributions; to be certain, check IRS Publication 526, “Charitable Contributions,” to locate the charity. You also can do a search on the IRS page titled “Tax Exempt Organization Search.”
Among the cash contributions that do not qualify, according to the IRS, are those “made either to supporting organizations or to establish or maintain a donor advised fund. … Cash contributions carried forward from prior years do not qualify, nor do cash contributions to most private foundations and most cash contributions to charitable remainder trusts.”
Limit Still High For Those Who Itemize
What about those one in 10 taxpayers who do itemize their deductions? In the past, contributions by itemizers to qualifying charitable organizations could be deducted, subject to certain limits that were typically between 20% to 60% of the donor’s adjusted gross income (AGI), according to the IRS.
That changed due to the CARES Act, and the changes remain in place for 2021. As a result, individuals can elect to deduct up to 100% of their AGI for qualified cash contributions that were made during the 2021 calendar year. However, be aware that the 100% limit is “not automatic.” According to the IRS, “the taxpayer must choose to take the new limit for any qualified cash contribution. Otherwise, the usual limit applies. The taxpayer's other allowed charitable contribution deductions reduce the maximum amount allowed under this election. Eligible individuals must make their elections on their 2021 Form 1040 or Form 1040-SR.”
The categories for those contributions that do not qualify are similar to those of non-itemizers (donor advised funds, etc.). For more details, see “Qualified Cash Contributions for 2020” under the section titled “Limits on Deductions” in IRS Publication 526.
Year-End Tax Planning
Marcum, a national accounting and advisory firm, has an excellent resource for year-end tax planning: “2021 Year-End Tax Planning Strategies for Individuals.” Among the suggestions related to charitable giving: “Sell depreciated stock and donate the cash proceeds to charity. You will receive a charitable deduction as well as a capital loss benefit on the sale of stock.”
QCDs For IRAs
Another donation to consider is a QCD – a qualified charitable distribution that can be used by IRA owners.
For an IRA owner age 72 or older who is taking mandated withdrawals, a QCD can be used to satisfy all or part of the RMD (required minimum distribution), as long as the amount is $100,000 or less. That donation triggers a withdrawal that would be taxable but for the QCD, as long as you follow specific rules that apply. One such rule is to have the IRA custodian pay the charity directly.
The idea behind using an RMD as a QCD is this: Instead of paying the RMD to yourself (and sending a check to the U.S. Treasury for taxes on the RMD), you direct your IRA custodian to pay the charity of your choice, avoiding the U.S. Treasury. Assuming your 2021 RMD is $50,000 and your tax bill is $10,000, doing a QCD gets $50,000 to the charity and saves you $10,000 that you would have had to pay at tax time.
You can find more details on QCDs at the IRS page on IRA FAQs – Distributions (Withdrawals).
There’s more. QCDs can also be used by IRA owners between the ages of 70 1/2 and 72 (RMD age). If you are 70 1/2 or older, you can also donate to charity using a QCD up to $100,000 in a year. That withdrawal will not be subject to income taxes. You won’t get a charitable deduction, however, as that would be double-dipping in a sense. Again, you have to follow QCD protocols.
By the way, QCDs don’t work with 401(k)s, only IRAs.
For The Record
Make sure to keep good records related to any charitable contributions donations you make. IRS Publication 526 gives extensive details of the recordkeeping rules that taxpayers should follow.
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