Gifts to charity are one of the best tax-saving opportunities available. Not only does the charity itself benefit, but taxpayers enjoy tax savings by deducting part or all of their contributions on their tax returns. For 2020, special rules provide more generous tax treatment for qualifying cash contributions. These temporary provisions will not apply after 2020 unless Congress amends the law.
- The Charitable Contributions Deduction allows taxpayers to deduct contributions of cash and property to charitable organizations, subject to certain limitations.
- For a charitable contribution to be deductible, the recipient charity must be a qualified organization under the tax law.
- Annual caps limit the total amount of charitable contribution deductions and special rules limit certain deductions based on the type of property donated and the type of tax-exempt organization receiving the donation.
- For 2020, cash contributions receive enhanced benefits: The annual cap is raised for cash contributions and taxpayers who do not itemize deductions may deduct up to $300 of cash contributions in addition to claiming the standard deduction.
The Basics of the Charitable Contribution Deduction
The tax treatment of a charitable contribution varies according to the type of contributed asset and the tax-exempt status of the recipient organization. Rules differ for individual, business and corporate donors. And the amount of the deduction is subject to standards and ceilings. For the 2020 tax year, special temporary rules increase allowable deductions and, thereby, the tax benefits for charitable gifts made in cash. Here's an outline of the rules for deducting charitable contributions, including the more generous allowances for 2020.
Not all donations qualify for deductions
The tax law imposes requirements designed to ensure that deductions are allowed only for contributions that serve a charitable purpose. Therefore, a recipient must qualify for tax-exempt status as required by the tax code and determined by the U.S. Internal Revenue Service (IRS).
The list of eligible entities includes organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes; the prevention of cruelty to animals or children; or the development of amateur sports. Nonprofit veterans' organizations, fraternal lodge groups, cemetery and burial companies, and certain legal corporations can also qualify if donations are designated for eligible purposes.
To determine whether an organization qualifies to receive deductible contributions, the IRS Tax Exempt Organization Search tool can help verify an organization’s tax-exempt status and determine its eligibility for deductible contributions. A donation to a federal, state, and local government may be eligible if the gift is earmarked for public purposes (such as maintaining a public park). Gifts to benefit a particular individual, a for-profit business or other private interest do not qualify as deductible charitable contributions.
Please note, a special measure in the CARES Act (the coronavirus relief bill) allows taxpayers to take an above-the-line deduction for up to $300 in charitable cash donations beginning in 2020. This means, even if you take the standard deduction, you can still claim up to $300 in donations for 2020 when you file your taxes in 2021.
Rules for claiming a deduction: who, what, and how much
In order to get the potential tax benefits, individual taxpayers must file IRS Form 1040. Except for a special benefit available only in 2020, charitable contributions must be claimed as itemized deductions on Schedule A.
For 2020, taxpayers who claim the standard deduction on their tax returns are entitled to deduct up to $300 of charitable contributions made in cash "above-the-line," that is, in calculating their adjusted gross income (AGI). Certain types of contributions are not eligible for the $300 deduction, including (1) gifts of noncash property, such as gifts of securities; (2) contributions to private non-operating foundations; (3) donations to supporting organizations and new or existing donor-advised funds; (4) contributions to veterans’ organizations, fraternal societies and certain cemetery and burial companies; and (5) contribution carryforwards from earlier years.
The above-the-line deduction of $300 will benefit many taxpayers who do not itemize. Because of the present, high levels for the standard deduction, and the ceiling on state and local tax deductions, many taxpayers realize greater tax savings by claiming the standard deduction rather than itemizing. The 2020 standard deduction is set at $24,800 for joint returns and $12,400 for unmarried individuals, with an added $1,300 for each married individual over age 65 or blind, or $1,650 for unmarried individuals. State and local tax deductions are capped at $10,000 ($5,000 if married filing separately).
Often, taxpayers whose total itemized deductions, including charitable deductions, for a year would be less than the standard deduction are advised to group their charitable contributions into a single tax year to maximize their tax savings. They may choose to donate in one year the gifts that they might otherwise donate over two years, then skip a year. For 2020, some taxpayers, particularly those at low- and middle-income levels with modest charitable contribution totals, may find that the special $300 deduction negates any benefit from grouping two or more years’ charitable gifts.
'Quid-pro-quo' contributions allowed only partial deduction
For certain donations, some calculation is required to determine the amount that can be deducted. These include ‘quid-pro-quo’ donations for which the donor receives an economic benefit, e.g., goods or services, in return for the gift. If a donor receives a T-shirt "for a cause" in return for a contribution, the entire amount of the contribution is not deductible. The deduction is limited to the amount of the contribution that exceeds the fair market value of the shirt.
For example, if the contribution is $40, and the fair market value of the T-shirt is $20, the deductible amount is only $20 ($40 donation – the shirt's $20 value). The same rule applies for contributions for events like charity dinners, where the fair market value of the meal must be subtracted from the cost of the event to determine the amount of the deduction.
Deduction for donated goods set at fair market value
Charitable contribution deductions are allowed for donations of goods, including clothes, household items, and more to Goodwill, the Salvation Army, and similar charities. But these types of noncash gifts have their own rules. Used clothing and household items must be in usable good condition; additional regulations apply to vehicle donations. The amount of the deduction is limited to the item's fair market value at the time of contribution, e.g., its thrift-store price.
Some tax preparation programs include a calculator to help determine items' fair market values. When a taxpayer claims more than $500 in total deductions for noncash contributions, IRS Form 8283 must be filed with the tax return. IRS Publication 561 is a useful resource to help you decide the value of your noncash contributions.
Donation Limits: Special 2020 Rules
The tax code imposes various limits on the deductible amount for certain charitable contributions. For 2020, the limits are increased for certain cash contributions.
Caps on deductions for cash contributions raised for 2020
For 2020, the ceiling on deduction for charitable contributions of cash is increased. Previously the deduction for cash contributions to qualifying organizations was limited to 60% of an individual taxpayer’s contribution base, which is generally equal to taxpayer’s adjusted gross income, AGI (calculated without any net operating loss carrybacks). For this one year, taxpayers may deduct the amount of their cash charitable contributions in excess of their allowable noncash charitable contributions, up to the full amount of their AGI. This higher ceiling will enable some taxpayers to eliminate all their taxable income. If a taxpayer’s contributions exceed the ceiling, the unused amount may be carried forward for up to five years.
The organizations that qualify for the increased ceiling for cash contributions are entities operated for religious, charitable, scientific, literary, or educational purposes; the prevention of cruelty to animals or children; or the development of amateur sports; as well as private operating foundations and certain governmental units. For non-qualifying organizations, which include (1) private non-operating foundations, (2) supporting organizations and existing or new donor-advised funds; and (3) veterans’ organizations, fraternal societies and certain cemetery and burial companies, total deductions continue to be capped at 30% of the taxpayer's AGI.
Non-cash contributions are not eligible for the increased ceilings. Noncash contributions to qualifying organizations continue to be capped at 50% of the individual donor’s AGI. Non-cash donations to non-qualifying entities continue to be capped at 30% of AGI. Also, contributions of appreciated capital gain property generally are capped at 30% of AGI if made to qualifying organizations, and 20% of AGI in the case of non-qualifying organizations, including private non-operating foundations.
The higher ceiling on deductions for 2020 offers a tax-planning opportunity potentially attractive to high-bracket taxpayers who make cash contributions. High-bracket taxpayers planning to make significant cash contributions in 2021 might evaluate whether making such gifts in 2020 in order to take advantage of the temporary, higher ceilings would result in greater tax savings than would spreading the gifts over two or more years.
2020 benefits for business
Businesses making charitable contributions in 2020 also are eligible for some increased benefits. Sole proprietors and owners of “pass-through” business entities report the deductions on their own returns in accordance with the rules for individual taxpayers, including the increased ceilings for cash gifts. For C corporations, contribution limits are increased for cash donations from 10% to 25% of taxable income (with some adjustments). Special rules apply for businesses’ contributions of food inventory. The cap on such contributions generally is increased from 15% of net income for owners of pass-through businesses and from 15% of taxable income for C corporations to 25% in each case.
Benefits for specific circumstances
From time to time, the tax code provides ceilings higher than those generally applicable for special interest situations, for example, to assist recovery from a disaster or to benefit a specific industry or purpose. Currently, a qualified farmer or rancher can claim a qualified conservation deduction of up to 100% of adjusted gross income (less other allowable charitable deductions ) for a contribution of property for agriculture or livestock production, provided that the property continues to be used or available for such production.
Deductions require records
Taxpayers must keep detailed records to support their charitable deductions. In order to claim a deduction for cash, you must have a written record, canceled check, or bank/payroll debit. Every contribution of more than $250 in cash or property must be backed by a written acknowledgement from the donee stating the amount of the contribution, whether or not any goods or services were provided to the contributor, and the fair market value of any such goods or services. Significant property contributions also require appraisals.
The Bottom Line
For specific guidance about what is and isn't allowed, download a copy of IRS Publication 526 and Form 8283 (for noncash charitable donations) for easy reference. In addition, check IRS Charitable Contribution Deductions, which is updated to include the special rules for 2020, to clarify any applicable limits on deductions.