America is unique. Our society is still heavily based on the free market, the free exchange of ideas, freedom of association and choice, and individual rights. We don’t just lead the world in innovation and social change; we are also a leader in charitable contributions and causes. There are 1.54 million charitable organizations in the nation. Just like the country fosters the risk-taking entrepreneurial spirit, the pay-it-forward mentality is just as robust and inherent to our culture—and a part of the tax law reflects that.
Whether you are looking to leave part of your estate to a charity, you run a business that supports a charitable cause, or you are an individual taxpayer that believes in an organization’s mission, the charitable contribution deduction can be part of your tax planning and strategy.
So, where did it all begin? Let’s dive into the charitable contribution deduction and how you can use your money or revenue to support a cause that matters to you.
The Charitable Contribution Deduction Began With a World at War
In 1916, the world was engaged in what would erroneously be known as the “war to end all wars.” A year before America’s entry into World War I, Congress had passed the Revenue Act in 1916. The law increased the income tax, but once America entered the war a year later, it was clear that funding the war efforts would require more money. Congress then passed the War Revenue Act of 1917, and tucked snugly within that law was a provision about tax-deductible contributions to charities.
This deduction would be necessary to help charities and non-profit organizations survive the war years. The law specified, “contributions or gifts actually made within the year to corporations or associations organized and operated for religious, charitable, scientific, or educational purposes…” The spirit of giving was evident far before that, however. Famed French philosopher Alexis de Tocqueville observed in the mid-1800s, America’s ability to come together and support religious, moral, and scientific causes.
In the early 20th century, several successful moguls and entrepreneurs espoused the idea of charitable giving as a kind of moral duty. Many supported a wide range of altruistic causes that would advance society in a variety of ways. Andrew Carnegie is perhaps one of the most well-known, as he wrote about the need for philanthropic endeavors in those that have surplus wealth.
Since then, charitable contributions have been an important part of tax planning for many individuals and businesses. The law helped foster a climate where supporting causes provided an incentive—a win-win for the society and the individual.
The Charitable Sector in the United States
The law was only part of what would grow to be a considerable charitable sector in the United States that would employ millions of Americans and impact lives in a myriad of ways. The nonprofit sector employs about 10 percent of the American workforce (or 11.4 million jobs). In 2016, Americans gave about $390 billion to charity, and even in the throes of a worldwide pandemic in 2020, half of Americans gave to charity. The state of Alabama, for example, has more than 18,000 charitable organizations and employs about 5% of the state’s workforce.
The charitable sector allows people to support causes that include medical research to educational scholarships, homeless shelters, animal shelters, and many more noble pursuits.
How Does a Charitable Contribution Affect My Taxes?
Just like any other part of a tax return, the specifics of the charitable contribution change. Nevertheless, whether you are filing as an individual or a business, making a charitable contribution can benefit you as well come tax season. How does it work?
When an individual or business gives to a qualifying charitable organization, they can deduct that amount from their taxes. Generally, the amount taxpayers can deduct on Schedule A as an itemized deduction has a percentage limit of the taxpayer’s adjusted gross income (AGI). Some qualified contributions are not restricted by this limitation.
Here’s what to know for tax season:
- To qualify, the contribution must be a cash donation, be made to a qualifying organization, and made during the previous calendar year.
- Usually, individuals that file for the standard deduction cannot claim their charitable contributions.
- In 2021, the IRS is allowing individuals that file for a standard deduction to claim a certain amount of charitable contributions.
- Individuals that itemize their deductions can generally claim a deduction for charitable donations with a limit of 20% to 60% of adjusted gross income.
- The corporate limit increased to 25% of taxable income. This applies to C corporations that make qualifying donations to charitable organizations. The normal amount is 10%.
- There is also an increased amount that businesses can deduct for charitable giving that is donated food inventory.
When it comes to donating to charity, individuals and businesses should keep records to ensure that any IRS inquiry into these donations can be substantiated.
Find Tax Planning Strategies While Supporting a Better Future with Our Help!
The great thing about charitable contributions is that individual taxpayers and businesses can support causes that are important and meaningful to them. It is thanks to these types of contributions that support life-saving research, religious institutions, supportive institutions, and educational opportunities that make America the innovative and amazing country it is.
Have questions about tax planning and tax strategies? Call Sovereign CPA today and speak to our qualified professionals.