Whatever your reason for giving this year, it’s important to know how your charitable contributions can impact your financial plan. In fact, being strategic and intentional in your 2021 contributions can create tax benefits for you while benefiting your chosen charity.
Research Charitable Organizations
Maximize the impact your monetary donation can have by selecting reputable and transparent organizations. A qualified charity will have 501(c)(3) status, indicating it’s federally recognized as a non-profit organization.
Third-party websites like Charity Navigator, Charity Watch and Give Well offer unbiased, independent ratings and evaluations of charitable organizations. These sites can offer important insights into how money donated is distributed. If you’re considering making a sizeable donation, it may be helpful to speak directly with the chosen charity to discuss how the gift will be utilized.
If you haven’t already, check with your employer about what opportunities they provide regarding charitable giving. For example, some employers will match employee donations to certain organizations.
Consider Itemizing Your Deductions
To deduct charitable donations, you must itemize them on an IRS Schedule A form. To do this, you’ll need to keep track throughout the year of each donation made to a charitable organization. In most cases, the charity can provide you with a form to document your contribution. If the charity does not have such a form handy (and some do not), you may be able to use other forms of proof including:
- Credit or debit card statements
- Bank statements
- Canceled checks
When reporting deductions, the IRS may want to know a few important details such as the name of the charity, the gifted amount and the date of your gift. If the organization only provided a hard copy of the donation confirmation, consider scanning or snapping a photo and saving this alongside your other tax documents.
Remember, itemized deductions may only have tax benefits when they exceed the standard income tax deduction, so be sure to check on the standard deduction amount for your tax filing status. You might also want to consider bunching your charitable deductions every other year if your itemized deductions are close to the standard deduction amount, which will help reduce taxes over each two-year period.
Make Non-Cash Donations
Many charities welcome non-cash donations. In fact, donating an appreciated asset can be a tax-savvy move as long as they have been held for at least 1 year.
For example, you may wish to explore a gift of highly appreciated securities. Selling securities can lead to a taxable event. As an alternative, you or a financial professional can write a letter of instruction to a bank or brokerage, which can facilitate authorizing a transfer of shares to a charity. If a charity accepts cryptocurrency, that would be another potential option if you have significant gains and held the cryptocurrency for at least a year.
This transfer can accomplish three things:
- You can avoid paying the tax you would normally pay upon selling the shares.
- You may be able to take a current-year tax deduction for the full fair market value of the shares.
- The charity gets the full value of the shares, not their after-tax net value.
Make Donations from Your IRA
If you are age 70.5 or older, you can donate up to $100,000 per year from your IRA as a Qualified Charitable Distribution (QCD). To do so, you would either donate shares in-kind or have a check made payable to the charitable organization.
Normally any distributions from your IRA as taxable at your marginal tax rate, but QCDs are excluded from income, which is beneficial if you don’t itemize deductions. If the IRA distribution first goes to your bank account and then you make the donation to charity, it would not count as a QCD. As a result, the IRA distribution would be included as income and you would only be able to deduct the donation if you itemize your deductions.
Additionally, QCDs count toward your required minimum distribution (RMD) each year once you reach age 72. By utilizing this strategy and excluding this income from your tax return, you can reduce your AGI, which might decrease Medicare premiums in subsequent years or reduce the amount of Social Security income that is taxable.
If you decide to make a QCD, please remember to keep records, as the 1099-R provided by the custodian won’t specify the amount of the IRA distribution that was for charities. Therefore, you will need to provide the amount of donations to your accountant to ensure that income is excluded from your tax return.
Utilize Your Life Insurance Policy
Do you have a life insurance policy? If you make an irrevocable gift of that policy to a qualified charity, you can get a current-year income tax deduction. If you keep paying the policy premiums, each payment may become a deductible charitable donation - although deduction limits may apply.
If you pay premiums for at least three years after the gift, that could reduce the size of your taxable estate. The death benefit may be transferred out of your taxable estate, in any case.
You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments. Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications.
Whatever your situation, getting advice from a tax or financial professional can help you give wisely as the year comes to a close. If charitable giving is an important part of your financial plan, it’s important to make sure you’re getting the most value out of each donation.
This content is developed from sources believed to be providing accurate information, and provided by Strategic Financial Planning, Inc. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered legal or tax advice.