Tax deductible charity donations for U.S. tax payers

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Charity Donations U.S. Taxpayers

According to a recent poll, about 55% of American citizens donated to charities in 2020. Around 25% of them donated more than $500. Close to 45% of the more than 3,800 American adults polled by Invisibly in January 2021 said that the Covid-19 pandemic affected the amount they donated to charities during 2020. Nearly 20% of the respondents stated that the pandemic motivated them to make more charitable donations than in the past. On the other hand, 25% said that the pandemic made it impossible for them to donate more. A majority of these were tax deductible charity donations.

Making a donation to a charity is in fact one of the top opportunities to save tax. Not only does the donation benefit the charity itself, but taxpayers pay less tax because they can deduct part or all of the charity donations from their income tax for that year (up to a maximum amount). Special rules provided particularly generous tax treatment for cash contributions that meet certain qualifications in 2020. See the last part of this article for the latest updates.

The 2020 (Coronavirus Aid, Relief, and Economic Security) CARES Act made it possible for Americans to deduct as much as $300 from their taxes for that year in respect of charitable donations. What is important is that the CARES Act describes this as an ‘above-the-line’ deduction, i.e. taxpayers do not need to itemize to qualify for this deduction.

The basics of charity donations and tax deductions for U.S. taxpayers

The tax benefits of a charity donation depend on whether or not the recipient organization is tax-exempt or not, and the type of asset you are contributing (e.g. cash or fixed assets).

Different rules also apply apply to individuals, corporate donors, and other businesses. Plus, there is a maximum amount that can be deducted subject to ceilings and standards. Special temporary rules were announced for the 2020 tax year that increased the maximum deductions and therefore the tax benefits of a charity donation made in cash.

How charitable donations work

Not all donations can be deducted for tax purposes. The tax law has specific requirements to make sure that deductions are only allowed for donations to charities. The recipient has to meet the requirements for tax-exempt status as determined by the U.S. Internal Revenue Service and the tax code.

You can’t, therefore, make a donation to your son at university and deduct that from your income tax. Donations to private individuals or private interests such as a for-profit business do simply not qualify as tax deductible charity donations.

There is, however, a fairly long list of eligible organizations. The core rule here is that they must be operated exclusively for charitable, religious, literary, scientific, or educational purposes; to promote amateur sports; or be active in the prevention of cruelty to children or animals;

Fraternal lodge groups, nonprofits working for the benefit of veterans, burial and cemetery firms, fraternal lodge groups, and some legal corporations might also qualify, depending on whether or not the donations are for eligible purposes.

A donation to a local, state, or federal government could be an eligible tax deduction if the donation is specifically earmarked to be used for purposes like maintaining public libraries or parks.

Limitations on charity donations

Generally speaking, donations to charities are tax deductible up to an amount that does not exceed 50 percent of the individual or firm’s gross income, as adjusted and not taking into account net operating loss carrybacks.

Donations to certain veterans organizations, private foundations, cemetery organizations, and fraternal societies are limited to 30 percent of gross income, as adjusted and not taking into account net operating loss carrybacks.

The limitation of 50 percent of gross income also applies to certain private foundations that redistribute the donations they receive to private operating foundations or public charities.

The limitation of 30 percent of gross income applies to private foundations except those mentioned above and to other organizations that do not qualify for the 50 percent limitation. The list here includes domestic fraternal societies.

Only partial deductions allowed for ‘quid-pro-quo’ contributions

For certain charitable donations, one has to do some calculations to determine how much can be deducted from income tax. The list here includes ‘quid-pro-quo’ donations for which the person making the donation receives certain services or goods in return. Let’s say you get a t-shirt from a charitable organization in return for a donation. In this case, the deduction will be limited to the amount of the donation less the realistic market value of the t-shirt.

For example, if you contribute $100, and the t-shirt’s fair market value is $40, the maximum amount you can deduct for tax purposes is $100 – $40 = $60. The same rule is applied in the case of contributions such as charity dinners, where you help to fund the cost of the event and in return you get a free meal plus perhaps some entertainment.

Donation to foreign organizations

Generally speaking, the approved list does not actually include foreign organizations but rather local ones that carry on charitable work in other countries. As far as tax deductible donations are concerned, these organizations are treated in exactly the same manner as any local organization.

Certain organizations with their head offices located in Canada may be regarded as foreign organizations to which Americans can make tax-deductible donations because of a tax treaty between the two nations.

Apart from such donations being subject to the same limits that apply to all your other charitable donations made under American tax law, your donations to Canadian charities are not tax deductible in the U.S. if you did not report an income from one or more Canadian sources on your U.S. income tax return for the same year. To put that in a nutshell: you can’t deduct donations to Canadian charities from income generated in the United States.

Except for the above, charitable donations to overseas organizations are not tax deductible in the United States.

Temporary exceptions that only apply to the 2020 tax year

The measures below only apply to the 2020 tax year.

Limits on charitable donations temporarily suspended

In the majority of cases, for the 2020 tax year taxpayers are allowed to deduct an amount not more than 60 percent of their gross income as an itemized deduction on Schedule A. This limitation does not apply to qualified contributions, which can be claimed up to an amount equal to 100 percent of the taxpayer’s adjusted gross income.

A corporation is allowed to deduct charitable donations of not more than 25 percent of its total taxable income. Amounts that exceed this maximum may, however, be carried over to the following tax year. To qualify the donation has to be:

– made in cash
– donated to an organization that qualifies
– completed during the 2020 calendar year

Non-cash donations do not qualify for this temporary exception. Taxpayers are, however, still allowed to claim non-cash donations as a tax deduction, provided the normal limits are not exceeded.

Extension of special charity donations measures for 2020 to 2021

The deduction limitation of 60 percent of adjusted gross income for charitable donations that was temporarily suspended in 2020 has now been extended into 2021 – but only for qualifying cash contributions.

In 2021 a U.S. taxpayer who makes a cash donation to a public charity, or a few private foundations, and who itemizes his or her tax deductions, is allowed to deduct as much as 100 percent of their adjusted gross income in respect of charity donations. This is after first taking into account other charitable donations, and subject to the normal limitations on charity donations.

Individual taxpayers are also allowed to once again carry forward charitable donations that could not be deducted in any particular year to the next year, for a maximum of 5 years. The stipulation that an individual taxpayer can claim up to 100 percent of his or her adjusted gross income as charity donations will, however, no longer apply from 2022.

For this year (2021) corporations are allowed to continue deducting charitable donations to a maximum of their taxable income (up from 10 percent).

Wrap up

The 2020 suspension of the necessary minimum distribution from the majority of retirement plans seems not to have been carried over to 2021 and beyond. Keep in mind that the tax rules set out above only apply to federal taxes. State laws may not be the same. For in-depth information on how the extension of the provisions of the CARES Act could impact your particular financial situation, please consult with a financial, legal, or tax advisor. The IRS has a Tax Exempt Organization Search tool that can help to determine whether or not an organization can receive tax deductible charity donations.