What Does the CARES Act Allow for Charitable Contributions?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, was legislation aimed at providing widespread economic relief during the early stages of the COVID-19 pandemic. A key component of this law involved temporary changes to the tax code designed to encourage charitable giving by both individuals and corporations. The modifications temporarily altered long-standing rules for tax deductions related to charitable donations, though these changes have since expired.

Deduction for Individuals Who Do Not Itemize

The CARES Act introduced a new, temporary charitable deduction for individuals who do not itemize their deductions on their federal tax returns. Previously, only taxpayers who itemized could receive a tax benefit for their charitable gifts. This provision allowed a taxpayer taking the standard deduction to also claim a deduction for cash contributions made to qualified charitable organizations. This was structured as an “above-the-line” deduction, meaning it reduced a taxpayer’s adjusted gross income (AGI).

For the 2020 tax year, this deduction was capped at $300 per tax return. The benefit was extended through 2021 and modified to allow a deduction of up to $300 for single filers and $600 for married couples filing a joint return.

When it was available, this specific deduction was limited to contributions made in cash, which included payments by check, credit card, or electronic funds transfer. Donations of property or securities were not eligible. Furthermore, the law specified that these cash gifts had to be made to qualified public charities, while contributions to certain organizations, such as donor-advised funds or most private foundations, did not qualify.

Increased Limits for Individuals Who Itemize

The CARES Act also provided temporary benefits for individuals who itemize their deductions. Under standard tax rules, an individual’s deduction for cash contributions to public charities is limited to 60% of their adjusted gross income (AGI). AGI is a measure of income calculated from your gross income, which includes wages, dividends, and other earnings, minus certain specific deductions.

The CARES Act temporarily suspended this 60% of AGI limitation for qualified cash contributions made during 2020 and 2021. For those two years, individuals could elect to deduct qualified cash donations up to 100% of their AGI. This allowed a particularly generous donor the possibility of completely eliminating their taxable income for the year through charitable giving.

A “qualified contribution” under this temporary provision had to be made in cash directly to a 501(c)(3) public charity. Similar to the rule for non-itemizers, contributions to donor-advised funds and certain private foundations were not eligible for the enhanced 100% AGI limit. If a taxpayer’s donations exceeded their AGI in a given year, the standard five-year carryover rule still applied, allowing them to deduct the excess amount in subsequent years.

Enhanced Deductions for Corporations

Corporations also saw their ability to deduct charitable contributions temporarily expanded under the CARES Act. Ordinarily, a corporation’s charitable deduction is limited to 10% of its taxable income for the year.

For cash contributions made to qualified charities in 2020 and 2021, the law raised the deductible limit from 10% to 25% of the corporation’s taxable income.

The act also included a specific enhancement for donations of food inventory. For 2020, the deduction limit for corporations contributing food inventory for the care of the ill, the needy, or infants was increased from 15% to 25% of taxable income.