The Consolidated Appropriations Act of 2021 (CAA, Public Law No. 116-260) was signed into law on December 27, 2020. The Act extends and expands changes to the rules of charitable giving enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (CARES Act, Public Law No. 116-136) and increases the penalty for tax underpayments attributable to an overstated charitable contribution by a taxpayer who does not itemize.
(1) Expansion of the Above-the-Line Charitable Deduction. Under the CARES Act, individual taxpayers who take the standard deduction are allowed an “above the line” charitable income tax deduction equal to the amount of charitable cash gifts, but only up to $300. The CARES Act did not specifically address how the deduction applied to a married couple.
Under the CAA, a married couple, for contributions paid in calendar year 2021, will be allowed to take such deduction up to $600. This provision is permanent.
The deduction continues to be only eligible to individuals who do not itemize their deductions (individuals who itemize deductions continue to be entitled to a charitable income tax deduction). It is limited to contributions of cash and does not include contributions to a supporting organization, a donor advised fund or most private foundations. It also does not include any carryovers of excess charitable contributions from previous years.
(2) Extension of No AGI Limitation for 2021. Under the CARES Act, for contributions paid in calendar year 2020 (and 2020 only), an individual or married taxpayer who itemizes his or her charitable deductions is allowed to claim a deduction for cash contributions equal to up to 100% of his or her adjusted gross income (AGI), computed without any net operating loss carryback to the taxable year.
The CAA extends such provision for contributions paid in calendar year 2021 (and only 2021).
This provision continues to not apply to contributions to a supporting organization, a donor advised fund or most private foundations. However, an individual could form a private operating foundation, which would allow the donor more control, and still receive the 100% AGI deduction.
(3) Increase in Penalties for Tax Underpayments. A 50% penalty applies to any tax underpayments attributable to an overstated charitable contribution by an individual who does not itemize his or her deductions
New Provisions for Non-Itemizers
For tax years after 2017, the Tax Cut and Jobs Act of 2017 (Public Law No. 115-97) substantially increased the standard deduction for both individual and married taxpayers (and also limited some itemized deductions). This meant that many taxpayers who previously itemized are no longer doing so, and because of this, did not have an incentive to make charitable contributions. Charitable organizations are concerned that the lack of the charitable income tax deduction incentive will decrease the amount of donations.
As noted above, for taxable years beginning 2020, a taxpayer who takes advantage of the standard deduction may take an above the line charitable deduction of up to $300. For taxable years beginning 2021, a married couple filing jointly who takes advantage of the standard deduction may take an above the line charitable deduction of up to $600. The “above-the-line” deduction means that it can be deducted from income even if the taxpayer claims the standard deduction.
Limitations on the Charitable Deduction for Taxpayers who Itemize
A taxpayer’s charitable deduction is subject to an overall limitation based on the taxpayer’s adjusted gross income. This limitation depends on whether the recipient organization is a public charity or a private foundation and the type of property contributed.
To the extent a taxpayer has a charitable deduction in excess of the applicable AGI limitation, the amount can be carried forward for five years.
The AGI limitations can be “stacked” on one another and each contribution is subject to the separate limit. For instance, a taxpayer could have an AGI of $100 and make a $30 cash gift to a private foundation, a $30 cash gift to a donor advised fund, and a $40 cash to an operating public charity, and all of the deductions would count against income.
The chart below shows the new AGI limitations for 2021.
SUPPORTING ORGANIZATION, &
PRIVATE OPERATING FOUNDATION
|TYPE OF PROPERTY||DEDUCTIBLE AMOUNT||DEDUCTION LIMITATION AS A PERCENTAGE OF AGI||DEDUCTIBLE AMOUNT||DEDUCTION LIMITATION AS A PERCENTAGE OF AGI|
|Cash contributions||Cash amount||100% if to a public charity other than a supporting organization or DAF||Cash amount||30%|
|60% if to a supporting organization or a Donor Advised Fund|
|Ordinary Income Property||Cost Basis||50%||Cost Basis||30%|
|Short-Term Capital Gain Property||Cost Basis||50%||Cost Basis||30%|
|Long-Term Capital Gain Property (other than tangible personal property)||FMV||30%*||Qualified Appreciated Stock: FMV||20%|
|Long-Term Capital Gain Property / Tangible Personal Property – Property is Related Use||FMV||30%||All other LTCG Property: Cost Basis||20%|
|Long-Term Capital Gain Property / Tangible Personal Property – Unrelated Use||Cost Basis||50%|
*Taxpayers may elect to claim a deduction equal to cost basis in exchange for using the 50% limitation.