IOWA CITY, Iowa – The Larned A. Waterman Iowa Nonprofit Resource Center joined the Internal Revenue Service today to highlight a special tax provision that allows more people to deduct donations to qualifying charities on their 2021 federal income tax return.
The pandemic-related provision allows married couples filing jointly to deduct up to $600 in cash donations and allows individual taxpayers to deduct up to $300 in donations.
Under the temporary law, taxpayers don’t need to itemize deductions on their tax returns to take advantage of this, which creates tax-favorable donation options not normally available to about 90 percent of tax filers. Ordinarily, people who choose to take the standard deduction cannot claim a deduction for their charitable contributions. But this special provision permits them to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to qualifying charitable organizations by year’s end, December 31, 2021.
At a time when many charitable groups are struggling during the pandemic, the IRS highlights the new provision and urges people to make sure they donate to a qualifying charity. The special Tax Exempt Organization Search tool on IRS.gov can help people make sure they donate to a qualified charity.
“The pandemic has created unique challenges for tax-exempt organizations, and we want to make sure people don’t overlook this special tax deduction that’s available this year,” said Sunita Lough, IRS Commissioner of the Tax Exempt and Government Entities division. “Donations to qualifying charities can reduce people’s tax bill when they file in 2022.”
The LAWINRC is a prominent center at the University of Iowa College of Law with a mission to strengthen nonprofit organizations across the state. This special tax provision has the potential to encourage additional assistance to organizations hit hard by the pandemic. Some groups have seen reduced charitable donations and others have seen increased demand for their services during this unprecedented period.
“Our Center works with hundreds of nonprofit leaders each year, and it is clear that this pandemic has hit organizations asymmetrically,” said Paul Thelen, director of the LAWINRC. “For some, demand for services increased, meaning a critical need for additional resources. For others, it has meant a reduction or significant alternation of programming. Organizations that rely on earned income activities that had to be cancelled or postponed are still working to survive those losses. Congress wisely expanded the tax-deductibility of charitable contributions for 2020 and 2021, and that means more Iowans have an added incentive to further support organizations that make their communities healthier, smarter, cleaner, livelier, faith-filled, and prosperous.”
Included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, a more limited version of this temporary tax benefit originally only applied to tax-year 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted last December, generally extended it through the end of 2021.
Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify. Under this provision, tax year 2021 individual tax filers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married individuals filing joint returns.
Cash contributions include those made by check, credit card or debit card as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with their volunteer services to a qualifying charitable organization. Cash contributions don't include the value of volunteer services, securities, household items or other property.
The IRS reminds taxpayers that to receive a deduction, they must donate to a qualified charity. To check the status of a charity, they can use the IRS Tax Exempt Organization Search tool.
Cash contributions to most charitable organizations qualify for a deduction. But contributions made either to supporting organizations or to establish or maintain a donor-advised fund do not. Contributions carried forward from prior years do not qualify, nor do contributions to most private foundations and most cash contributions to charitable remainder trusts.
In general, a donor-advised fund is a fund or account maintained by a charity in which a donor can, because of their donor status, advise the fund on how to distribute or invest amounts contributed by the donor and held in the fund. A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities.
The IRS encourages all donors to be wary of scams masked as charitable solicitations. Criminals create fake charities to take advantage of the public’s generosity. Fake charities once again made the IRS's Dirty Dozen list of tax scams for 2021. In October, the IRS also joined international organizations and other regulators in highlighting the fight against charity fraud.
Keep good records
Special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining an acknowledgment letter from the charity before filing a return and retaining a cancelled check or credit card receipt for contributions of cash.
For details on the recordkeeping rules for substantiating gifts to charity, see Publication 526, Charitable Contributions, available on IRS.gov.
For additional information, contact the Larned A. Waterman Iowa Nonprofit Resource Center at law-nonprofit@uiowa.edu or 319-335-9765.