With Giving Tuesday just a few days away and nearly one-third of annual donations made in December, there’s still time to boost year-end giving to your organization. Tax incentives to encourage charitable donations as part of the CARES Act that are set to expire at the end of 2021 could be one approach.
While receiving an income tax deduction ranks low among reasons why people give, nonprofit leaders and fundraising professionals should be familiar with these changes to leverage them when possible. Please note that this information does not constitute tax advice. Encourage your donors to consult a tax professional to evaluate their personal situation.
What are the tax changes?
The one mentioned most often is the deduction for individuals who don’t itemize their tax returns. For the second year, they can claim a deduction of up to $300 for cash donations to qualified charities. A notable change for the 2021 tax year is that married couples filing jointly can claim up to $600.
Another incentive for 2021 allows individual taxpayers to deduct up to 100% of their adjusted gross income (AGI). That’s right – donors who itemize their taxes may be able to zero out their tax bill for the year!
One final provision pertains to corporations that make cash contributions to eligible charities. The 2021 deduction limit is 25% of taxable income, up from the usual 10%.
This sounds great! What’s the fine print?
There are a few important things to keep in mind for donors to receive the full benefit.
- These provisions require cash contributions only.
- Standard limits still apply for other gift types like noncash donations and appreciated securities.
- Contributions must be made to qualified organizations – sorry, donor-advised funds don’t count.
What should nonprofit leaders and fundraising professionals do now?
- Contact your annual fund donors who have not yet renewed this year and remind them to take advantage of this opportunity. Nearly nine out of ten taxpayers use the standard deduction and can take the $300 (individual) or $600 (married couple) above-the-line adjustment.
- Talk to your largest donors about maximizing annual gifts or accelerating pledge fulfillment. High-income taxpayers predominantly itemize deductions. The 100% AGI deduction provision is a great way to encourage generosity for select donors.
- Reach out to your corporate partners to make sure they are aware of the 25% deduction and request increased support. For many corporations, 2021 was a very profitable year and they may want to reduce their tax burden.
Is this too good to be true?
For the most part, no. The incentives are straightforward for donors who don’t itemize and for corporations that do. The 100% AGI deduction is a little more nuanced. Just because you can do something, doesn’t mean that you should.
With graduated tax brackets, it might not be in a donor’s best interest to take the maximum deduction. The lower their AGI, the lower the tax rate that applies to each additional dollar donated resulting in diminishing returns.
Instead of deducting 100% of AGI this year, donors who carry a portion of their donation forward may end up paying less taxes overall. Even though it might be intoxicating to think about not paying taxes for a year, the total tax paid could end up being more than if one spreads those same donations over multiple years.
What’s the bottom line?
While not everyone can take advantage of these changes, those who do so can make a significant impact for their charity of choice this year. Take steps now to make sure your organization benefits by proactively engaging those who are most likely to donate. If you don’t ask them, someone else will.