Financial Monthly: All About Giving

It’s Time to Think About Giving!

The holiday season has officially begun. Decisions are upon us. All of the normal holiday decisions, like which Lego set to buy the little ones or which relatives to invite (or not) for dinner, are dancing through our heads.

While things are looking a little less cluttered on the tax calendar now, we are still busily helping clients make year-end adjustments for a more favorable tax return come 2022. One way to have a more favorable tax return is to spread the holiday cheer through some IRS-approved charitable giving. While you're planning out all those gifts, you can plan some causes to give to as well. After two years of hard hits on the economy, there are plenty of people and places needing help. Here are some tax break-giving ideas to get you started.

Here's a quick overview of four expanded tax benefits this year for both individuals and businesses.

1. Larger deduction for nonitemizers: In most tax instances, you must itemize expenses to get a deduction for your charitable gifts. However, a new law now allows for a limited deduction on 2021 federal taxes for cash contributions made to certain qualifying charitable organizations. And this tax year, it was increased for married couples filing joint returns.

Individual taxpayers, including married people filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. Married couples filing jointly get twice that, $600 directly on their Form 1040s.

2. More if you itemize: Tax laws usually limit the donations a person can deduct when itemizing on Schedule A. You can only give up to a certain percentage of your adjusted gross income (AGI).

These limits typically range from 20% to 60% of AGI, depending on the type of contribution and charitable organization. For example, a cash contribution made by an individual to a qualifying public charity, those known as 501(c)(3) nonprofits, generally is limited to 60% of the taxpayer's AGI. Contributions in excess of that percentage may be carried forward for up to five tax years.

For 2021, however, the individual contribution limit for cash donations to qualifying charitable organizations is increased to up to 100% of AGI. To take advantage of the increased limit, you must make the election to do so for any given qualified cash contribution when you file your Form 1040.

3. Corporate giving also hiked: Tax law now also permits C corporations to apply an increased limit. It's up to 25% of the corporation’s taxable income for cash donations to eligible charities during 2021. C corporations must also elect the increased corporate limit on a contribution-by-contribution basis.

4. Food donations increased: Businesses donating certain food inventory may qualify for increased deduction limits. For contributions made in 2021, the limit for these contribution deductions is increased from 15% to 25%. As noted in Item #3, the 25% limit for C corporations is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their aggregate net income for the year from all trades or businesses from which the contributions are made. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.

At Alexander Fitzgerald & Associates, LLC, we’re always game to help you think this through for your specific tax situation.

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