Here’s what you need to know about charitable deductions and the special CARES Act provision that allows anyone to deduct $300 in qualifying donations
- What is the $300 charitable deduction?
- What charitable organizations qualify?
- How does this interface with the standard deduction?
As you’re getting ready for tax season, it’s essential to tally all the deductions and credits you’re eligible for and figure out if you want to take the standard deduction or itemize. Tax laws change, and there may be new deductions or additional steps to take, especially in the wake of government relief and other changes wrought by the COVID-19 pandemic.
One area to consider is your contributions made to charitable organizations. Fortunately, a new provision from the IRS allows many taxpayers to deduct up to $300 in qualifying charitable donations whether or not they take the standard deduction.
Do your contributions qualify? Here’s an overview of what the new $300 charitable deduction entails and a look at which donations are considered charitable contributions. We’ll then briefly go over choosing the standard deduction versus itemizing.
What is the $300 charitable deduction?
Qualifying cash donations of up to $300 made before December 31, 2020, can be deducted by taxpayers this year. The provision was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in early 2020, and aimed to encourage Americans to support charities that may be struggling through the pandemic. One study showed that 91% of charitable organizations had experienced some negative impact from COVID-19.
Other provisions included to help charities were higher contribution limits for corporations, individuals who itemize deductions, and businesses that donate food to charities.
One significant benefit of this new deduction is that taxpayers don’t have to itemize their deductions to claim it, as is usually the case. Instead, they can claim an “above-the-line” deduction, as the IRS terms it, of a maximum of $300 for charitable donations. This lowers the taxpayer’s adjusted gross income and taxable income.
Cash donations must have been made by check, credit card, or debit card. Excluded from eligible donations are securities, household items, and other property. You also cannot deduct time or services donated to an organization.
What are qualifying charitable organizations and donations?
Most donations made to charities will qualify, but there are some exceptions to be aware of. Note that contributions made to supporting organizations or donor-advised funds do not qualify for the $300 provision.
The IRS defines qualified charitable organizations as:
- Community chests, corporations, trusts, funds, or foundations that operate solely for charitable, religious, scientific, literary, or educational purposes, or for the prevention of animal or child cruelty.
- War veterans’ organizations.
- Domestic fraternal societies, orders, and associations that operate under the lodge system.
- Nonprofit cemetery companies or corporations.
- Government bodies, whether federal, state, or local, if donations are used for charitable causes.
To qualify as a charity, an organization cannot give any of its earnings to private shareholders or individuals. Political contributions and homeowners’ association donations, for example, are not included. But those given to nonprofit schools, hospitals, and churches are eligible. Most donations to foreign organizations are excluded.
If you’re unsure whether an organization qualifies, you use the Tax Exempt Organization Search tool on the IRS website. It helps donors ensure that an entity is an IRS-registered 501(c)(3) organization and that a contribution qualifies for the deduction.
Remember to keep a record of the transaction when you donate. Most organizations provide a receipt or send an acknowledgment letter, so you have evidence of the amount you contributed.
How does it interface with the standard deduction?
Many taxpayers take the standard deduction, which means they don’t itemize each individual deduction for the year. Both options have their pros and cons and are appropriate for particular circumstances—you should itemize if your total deductions are more than the standard deduction. Itemized deductions break down into categories like medical costs, interest paid, charitable contributions, and more.
For 2020, the standard deduction is $12,400 for single filers and $24,800 for married-filing-jointly taxpayers. For heads of household, the standard deduction is $18,650 for 2020 taxes. Everyone is entitled to the standard deduction, and it often saves taxpayers time when submitting their tax returns. But if you have many expenses to claim, the itemized route may help you pay less in tax.
But remember, the special $300 charitable donation deduction helps taxpayers who take the standard deduction. They can now benefit from this 2020 contribution, in addition to those who already decide to itemize.
Working with the team at Provident CPA & Business Advisors
As the COVID-19 pandemic continues into 2021, there will likely be more special provisions to keep in mind when preparing your tax return. It’s always wise to talk to a tax professional to be sure you’re claiming everything you’re eligible for.
When you’re ready to talk taxes, we’re ready to help. Our experts assist both individuals and businesses as they plan for the future, whether that’s long-term business growth or tax minimization. And we make sure you don’t leave money on the table when completing your return each year.
If you’re ready to get started, contact Provident today.