Every cloud has a silver lining. For nonprofits struggling in the wake of the financial chaos unleashed by the coronavirus (COVID-19) epidemic, there is at least one small bright spot. Congress has granted their long-held wish for a universal nonitemized "above the line" charitable deduction so that all taxpayers can deduct at least some of their donations. Unfortunately, the amount is much smaller than hoped for by nonprofit organizations.
For decades, the rule was that individual taxpayers could deduct charitable contributions only if they itemized their personal deductions instead of taking the standard deduction. If you didn't itemize, you got no deduction.
Taxpayers should itemize only if all their personal deductions, including charitable contributions, exceed the standard deduction. The Tax Cuts and Jobs Act (TCJA), which went into effect in 2018, roughly doubled the standard deduction. For 2020, the standard deduction is $12,400 for single taxpayers and $24,800 for marrieds filing jointly. At the same time, the TCJA eliminated or curtailed many valuable itemized deductions.
The result is that post-TCJA only 10% of taxpayers itemize their deductions, down from 30% pre-TCJA. In other words, since the TCJA went into effect, 90% of all Americans are unable to deduct their charitable contributions. As a result, giving has declined. According to the annual Giving USA report, total charitable contributions for 2018 fell by 1.7% from the prior year (adjusted for inflation). Smaller donations took the biggest hit during 2018. Donations under $250 declined by 4.4%.
To help alleviate the economic devastation caused by the coronavirus (COVID-19) pandemic, Congress has enacted the Coronavirus Aid Relief and Economic Security Act (CARES Act). Among its many provision is a brand new universal deduction for charitable contributions.
Taxpayers who don't itemize may now deduct up to $300 per year in charitable contributions. Such deductions must be:
Contributions to nonoperating private foundations, support organizations, and donor advised funds don't come within the new deduction.
Since this is a universal "above-the-line" deduction, taxpayers don't have to file Schedule A (itemize) to claim it. Instead, taxpayers list it as an adjustment to income on Schedule 1 of Form 1040 and then deduct it from their gross income (along with all other adjustments to income) on the first page of their Form 1040.
There is no requirement that taxpayers provide any documentation for their contributions with their tax returns. But, the IRS requires that taxpayers keep a written record of all cash contributions. For cash donations under $250, donors can use a bank statement or other documentation that substantiates that the payment was made. For all cash donations above $250, the donor must have a document or receipt from the nonprofit.
The $300 limit is much smaller than what nonprofit organizations wanted. They requested a deduction in the $2,000 to $3,000 range. The $300 deduction will cost the federal government $2 billion per year in lost taxes. Congress apparently believed that was all the U.S. Treasury could afford.
This new deduction may not raise that much money for charity. The Penn Wharton School of Business estimates that it will increase total charitable contributions this year by about $110 million. This is only 0.03% above what they originally projected.
Still, it's better than nothing. Nonprofits, especially those that rely on small donations, should alert the public to the new rule in fundraising solicitations. They could even ask donors to give $300 of the $1,200 stimulus checks soon to be sent out to most Americans by the IRS.
Under the TCJA, taxpayers who do itemize their deductions may deduct charitable contributions up to only 60% of their adjusted gross income. Any contributions over this amount must be deducted in future years. For example, if your AGI is $100,000 you may deduct no more $60,000 in charitable contributions; so if you contribute $70,000, the extra $10,000 must be deducted the next year.
For 2020 only, the CARES Act allows itemizers to deduct contributions up to 100% of their AGI. Thus, for example, if your AGI is $100,000, you may deduct $100,000 in charitable contributions and wipe out your income tax liability entirely. This may help nonprofits haul in some particularly large donations from wealthy itemizers who are charitably inclined.
Under the TCJA, the annual charitable deduction by a corporation is generally limited to 10% of taxable income, while a 15% limit applies to charitable contributions of food. The CARES Act increase these amounts to 25% of taxable income for 2020. Donations in excess of 25% may be deducted in the following five years.