New, Time Limited Above the Line Charitable Deduction for 2020 Underscores the Importance of Nonprofits Providing Gift Acknowledgements to Donors
By Amy Coates Madsen and Henry Bogdan
The “Coronavirus Aid, Relief and Economic Security” (or “CARES”) Act established what is called an “above the line” charitable deduction of $300 to stimulate charitable giving in response to the pandemic.[1]
Reductions to income taken “above the line” benefit taxpayers using the standard deduction. The 2017 tax bill greatly increased the standard deduction, and at the same time, capped the amount taxpayers could claim as itemized deductions for their state and local taxes. This combination in the 2017 tax bill significantly reduced the number of ”itemizing” taxpayers (and by definition, reduced the number of taxpayers permitted to take a deduction for their charitable contributions) and appears to have negatively impacted charitable giving nationally.
The purpose of the CARES Act’s $300 charitable ”deduction” was to promote charitable giving during the crisis by providing this ”above the line” tax incentive to the estimated 90% of all taxpayers nationally who now use the enhanced standard deduction.[2]
The CARES Act provides that the new deduction cannot be used by itemizing taxpayers—these taxpayers are still permitted to take their charitable contributions “below the line” as itemized deductions. This new benefit is limited to $300 on both individual and joint returns, and only applies to tax year 2020.
This benefit underscores the important responsibility that nonprofits carry to ensure that their donors receive appropriate acknowledgements and receipts for their donations. While it is not possible for every nonprofit to know whether each one of their donors is itemizing their taxes or taking the standard deduction, nonprofits have a responsibility to ensure that those who contribute to their missions receive appropriate documentation showing the charitable contributions made.
The Standards for Excellence program focuses on following best practices in your resource development and fundraising activities. The Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector states that a nonprofit’s “resource development policies should be consistent with its mission, compatible with its organizational capacity, and respectful of the interests of donors, prospective donors, and others providing resources to the organization.”
Standards for Excellence learning materials feature resources and tools to help nonprofits who are preparing acknowledgements and receipts for their donors. If you’d like more resources on how to write a policy to govern the acceptance of charitable gifts for your nonprofit or what statements are required in your fundraising receipts and acknowledgement, check out our Standards for Excellence educational resource packets Disclose It: A Charitable Nonprofit’s Guide to Disclosure Requirements and Fundraising, Solicitation and Acceptance of Gifts.
The full series of Standards for Excellence educational packets include sample policies, tools and model procedures to help nonprofits achieve best practices in their governance and management. They can be accessed by contacting a licensed Standards for Excellence replication partner, one of the over 150 Standards for Excellence Licensed Consultants, or by becoming a member of the Standards for Excellence Institute.
We share our sincere wishes for your continued good health and patience as we all navigate these challenging and uncertain times.
[1] How is this different from the existing charitable deduction, what “line” is that, and why put this “deduction” above it?
To start – think of the basic steps that go into calculating your tax liability. Conceptually these are:
- adding up gross income,
- applying adjustments (additions or subtractions) to gross income to yield adjusted gross income or “AGI”,
- deducting either “itemized” or the ”standard” deductions from AGI to determine net taxable income,
- calculating the tax due on the net taxable income,
- applying tax credits against that amount of liability,
- deducting taxes already withheld or paid to yield the amount of tax due.
The adjustments that reduce gross income in Step 2 to determine “AGI” are commonly referred to as “above the line,” as opposed to the deductions (including for charitable contributions) that occur after the AGI is calculated, that are considered to be “below the line.”* In some tax situations, ”above the line” reductions to income can be more advantageous than ”below the line” itemized deductions, that are more often subject to caps or limitations.
[2] Urban Institute and Brookings Institution Tax Policy Center, https://www.taxpolicycenter.org/briefing-book/what-standard-deduction#:~:text=The%20Urban%2DBrookings%20Tax%20Policy,itemizing%20their%20deductions%20in%202018.