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:
in cash (no property like old clothing), and
given to a 501(c)(3) public charity.
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.
No Annual Limit on 2020 Charitable Deduction by Itemizers
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.
Contributions by Corporations
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.