Whether you’re interested in charitable giving as an individual or as a small business owner, your efforts can serve a dual purpose in 2021. On the one hand, you can give back to your community and bolster causes that you care about. On the other hand, you can reap a potentially significant tax benefit. The potential tax benefits of giving back in 2021 are greater than ever, thanks to new legislative incentives inspired by the COVID-19 pandemic. To learn more about how you can maximize your charitable impact and tax benefits tied to that effort, connect with the knowledgeable team at Ferguson Timar for guidance.
Charitable Giving – The Basics
To incentivize charitable giving, the federal government offers potentially significant tax breaks to both individuals and businesses that give financial support to qualified charitable organizations. Individuals may take advantage of the “Charitable Contributions Deduction” by listing their qualifying financial or property contributions on Schedule A of their annual 1040 filing.
To qualify as viable deductions, individual charitable contributions of money or property must be made to organizations that fall under 170(c) of the Internal Revenue Code. Most donations to not-for-profit organizations, religious organizations, U.S. trusts or foundations operated for charitable, religious, scientific, literary, or scientific purposes, and educational institutions are eligible for itemized deduction, subject to specific value caps. Congress has significantly altered these caps, on a temporary basis, because of incentives inspired by the COVID-19 pandemic.
Business tax deductions are permitted when companies donate to bona fide 501(c)(3) organizations. Many businesses employ the use of a donor-advised fund to maximize the tax value of their charitable giving during any given year.
Giving as an Individual
Ordinarily, caps on individual charitable donations are dictated by each taxpayer’s adjusted gross income, or AGI. Donations to most organizations cannot be deducted beyond 50 percent of an individual’s AGI, whereas deductions to specific fraternal groups, veterans’ organizations, and not-for-profit cemeteries are capped at 30 percent of a taxpayer’s AGI.
However, tax breaks originating with the CARES Act in early 2020 and strengthened by a tax package passed during the last days of that year have broadened charitable giving incentives for both modest and especially generous charitable donors. Modest donors can now deduct several hundred dollars in cash donations ($300 for individuals, $600 for married, joint filers) above-the-line in 2021. The CARES Act allowed for an up to $300 above-the-line deduction in 2020 per return; the late 2020 tax package doubled this potential deduction for married, joint filers in tax year 2021.
This incentive applies to filers who itemize their deductions and those who take the standard deduction alike. Modest donors can, therefore, apply both the above-the-line deduction and the standard deduction (if they don’t want to itemize) which can add up to real savings. Also, the above-the-line deduction does reduce a filer’s AGI, which may render them eligible for additional tax breaks down the form. Note that eligible cash gifts do not include donations made to private foundations or donor-advised funds.
The CARES Act and late 2020 tax package also incentivized particularly generous charitable giving by eliminating the AGI limits on individual giving noted above. This unprecedented opportunity to deduct more than 50 percent of one’s AGI has been extended through 2021. If you’re able to give back to your community in particularly generous ways, the need created by the pandemic—combined with excellent tax incentives—makes 2021 an excellent time to donate to great causes.
Giving as a Small Business Owner
The CARES Act also incentivized corporate giving. In 2020—and 2021, thanks to the late December tax package—the standard 10 percent limitation applied to deductions on taxable income has been increased to 25 percent. This means that businesses, both large and small, can deduct up to 25 percent of their taxable income because of charitable giving to bona fide 501(c)(3) organizations in 2021.
Charitable giving can amplify a business’s presence within the community it serves and can boost company morale. Donations, drives, volunteering opportunities, and other outreach efforts can also provide networking opportunities with potential business partners. With the economic outlook for the remainder of the pandemic uncertain, maximizing your company’s charitable giving can benefit your business in more ways than one.
Connect with the Trusted Team at Ferguson Timar
If you are interested in taking advantage of the tax benefits afforded by uniquely generous 2021 deduction opportunities, consult with the Ferguson Timar team for charitable giving guidance and support. Connect with us online or give us a call at (714) 204-0100 to get in touch. We look forward to speaking with you.