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Temporary Tax Breaks Can Sweeten Your Year-End Generosity

Learn how pandemic relief policies expanded benefits for generous givers in 2021.

Signed into law in March 2020, the CARES Act was an essential part of our nation’s response to the hardship of the COVID-19 pandemic. And its measures included a number of temporary provisions to promote charitable giving.

In December 2020, another stimulus bill was enacted to combat the far-reaching effects of the pandemic. In many ways, the new package – known as the Consolidated Appropriations Act (CAA), 2021 – serves as an extension and enhancement of the CARES Act, particularly when it comes to charitable deductions.

Read on to learn how the latest COVID-19 relief bill helps reward generosity in 2021.

Enjoy enhanced deductions

In 2020, the CARES Act allowed taxpayers who weren’t itemizing to take an above-the-line deduction of up to $300 for charitable gifts made in cash. The CAA extends this measure for 2021 and allows for an above-the-line deduction of up to $600 for married couples who are filing their taxes jointly and aren’t itemizing.

One caveat? Gifts to donor advised funds (DAFs) and private foundations don’t count toward your deduction. Also excluded are contributions carried forward from past years and most cash contributions to charitable remainder trusts.

Another important note: The 2020 deduction reduced taxpayers’ adjusted gross income (AGI), but the 2021 deduction does not.

Make the most of 100% AGI

As in 2020, taxpayers who are itemizing in 2021 can deduct up to 100% – instead of the usual 60% – of their AGI for cash contributions. Keep in mind that this only applies to cash donations made toward public charities. It does not apply to contributions for supporting organizations or public charities that are sponsoring DAF programs.

There is good news for DAF holders, however: existing deductions for DAF contributions remain unchanged. This means you can still deduct up to 60% of your AGI for cash donations and up to 30% of your AGI for appreciated securities to a DAF. Also remember that standard carryover rules apply – so if your 2021 donations exceed your AGI deduction, you can carry forward excess deductions for up to five subsequent tax years.

Reap benefits like those of QCDs

Neither the CARES Act nor the CAA changed the rules surrounding IRA qualified charitable distributions (QCDs), which allow individuals aged at least 70 1/2 to annually donate up to $100,000 in IRA assets directly to a charity without having to take the distribution into taxable income.

Since taxpayers can currently deduct up to 100% of their AGI for cash charitable contributions, this means those who are 59 1/2 or older can reap benefits similar to a QCD. They are able to take a cash distribution from their IRA, contribute the cash to charity and offset the tax attributable to the distribution by taking a charitable deduction equal to 100% of their AGI for the tax year. If you’re planning a large donation in 2021, this could be a clever way to save on taxes as long as you’re between the ages of 59 1/2 and 70 1/2 and don’t depend on existing retirement funds.

Sources: Raymond James Charitable; kiplinger.com; forbes.com