Here's How the CARES Act Changed Charitable Contributions for 2020's Taxes
The COVID-19 pandemic made 2020 an unprecedented year in a vast number of ways. The greater part of society shut down to minimize the spread of the virus, which had an undeniably large impact on the economy. Pandemic-related issues left many people without jobs and many businesses needing assistance to stay afloat. As a result, many of us who were able to do so made charitable donations to help out. The U.S. government also stepped in to provide aid, in part via the $2.2 trillion economic stimulus bill known as the CARES Act.
The CARES Act changed tax deductions for charitable donations in 2020, partly to encourage more giving in a time of need. Were you one of the many who made this type of donation? Now that it's tax time again, it's important to understand the various changes so you can file for tax deductions in relation to your charitable donations.
How the CARES Act Impacts Your Taxes
In times of financial abundance, people often give more. When the economy is facing a downturn, however, people may have less to give or might be warier of giving in case they begin facing similar financial effects.
To lessen this likelihood during the pandemic, one provision in the CARES Act removed the income-related cap on charitable donations. The idea was to help nonprofit organizations, also known as 501(c)(3) qualified organizations, that experienced decreased contributions in 2020. Removing the cap encouraged people and corporations to make bigger charitable contributions than usual.
The CARES Act Opened Up Charitable Donation Tax Breaks to Everyone
Usually, in order to claim a deduction for a charitable donation you made to a 501(c)(3) organization, you have to itemize your tax deductions. The CARES Act changed that. Due to the act, Americans who don't itemize can deduct as much as $300 from their 2020 taxes for charitable donations they made during the year.
The $300 maximum deduction applies to each tax-filing unit. As such, married couples who file their taxes together can only deduct up to $300. The act passed in March, meaning that it may have encouraged more people who don't itemize tax deductions to donate, knowing they could be eligible for a tax break.
The way the CARES Act addressed charitable contributions represents a significant change from the ways the 2017 Tax Cuts and Jobs Act (TCJA) altered the system so fewer people benefited from above-the-line itemizations on deductions. More people then began to use the standard deduction, meaning they wouldn't get any tax benefit from charitable donations whatsoever. Thanks to the CARES Act, everyone who donated to nonprofit organizations in 2020 can now potentially receive a tax break.
How the CARES Act Made Charitable Donations a Win-Win
The CARES Act also changed how much a person who itemizes deductions on their taxes could deduct for their charitable contributions. Before, they could claim up to 60% of the amount of their adjusted gross income (AGI), and the CARES Act changed it to 100% of their AGI. Here's an example of this change. In 2019, if a person's AGI was $100,000, their maximum deductible charitable donation was $60,000 (60% of $100,000). In 2020, their maximum deductible charitable donation is $100,000, or 100% of their AGI.
If you donated more in 2020, it could potentially lower what you owe in taxes for the year. This is because when you make a charitable contribution, it equates to reduced income. So, giving more means you're taxed on less of your income. If you made $100,000 and donated $30,000 to a 501(c)(3), you'd be taxed on $70,000 of your income for 2020.
The CARES Act also increased the limit on charitable deductions for businesses. Usually, a corporation's maximum deductible charitable donation is 10% of its taxable income. In 2020, it increased to 25% thanks to the CARES Act.
What Counts as a Charitable Donation?
Only cash donations made in 2020 to 501(c)(3) nonprofits apply to the CARES Act deduction. Keep in mind that the deduction is specific to 501(c)(3) organizations, not any of the other 501(c) organizations. Included are public charities, private foundations and private operating foundations. All are highly regulated by the IRS.
To be clear, 501(c)(3) nonprofits run for charitable purposes and charitable purposes alone. Their charitable purpose could be scientific, literary, religious or educational. They could also be related to amateur sports, testing for public safety or the prevention of child and animal cruelty. Even though the CARES Act was passed in relation to the pandemic, the donations don’t have to be connected to COVID-19 to qualify.
If you donated physical goods or to donor-advised funds that indirectly support charities, those donations don’t count toward the 2020 CARES Act deduction. For example, donating food to a food bank or donating clothes to a local thrift shop won't qualify. You had to have made a cash donation paid by cash, check or credit card. To prove the donation in case you are audited, make sure to keep some sort of official receipt with a date on it, as special rules apply to deductions for charitable donations.
The Takeaway on Charitable Tax Deductions From the CARES Act
Simplified, here's what the CARES Act did regarding deductions on your 2020 taxes you can claim if you made charitable contributions to 501(c)(3) nonprofits. If you take the standard deduction and don't itemize deductions on your taxes, you can deduct up to $300 for charitable donations if you donated at least $300.
If you do itemize your taxes, the limit for your deductible charitable donation changed from 60% to 100% of your AGI. For corporations, the deductible charitable donation limit increased from 10% to 25% of their taxable income.
That tax incentive for charitable contributions made throughout 2020 no doubt impacted whether and how much people and corporations donated last year. The pandemic affected many people deeply, those who were able to stepped up and helped out where they could.