Whatever your reason for giving this year, it’s important to know how your charitable contributions can impact your financial plan. As financial advisors, we believe that being strategic and intentional with your 2021 contributions can create tax benefits for both you and your chosen charity. Here’s how:
Research Charitable Organizations
First, you should do some homework. With generosity, you should want to 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. This is important because some gifts require that the recipient be a qualified charitable 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.
Also, consider checking with your employer about what opportunities they provide in regards to charitable giving. Some employers will match employee donations to certain organizations. Find out if this applies to you.
Consider Itemizing Your Deductions
One of the biggest points of confusion for people and taxes is the difference between taking the standard deduction versus itemizing 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.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. This is why we feel that it is important to keep track of your giving throughout the year. The total of your qualified gifts will be included in the total of your itemized items on your tax returns. In some cases, your charitable giving may be what allows you to itemized deductions on your tax returns.
Make Non-Cash Donations
Many charities welcome non-cash donations. In fact, donating an appreciated asset or investment can be a tax-savvy move.
For example, you may wish to explore a gift of highly appreciated securities. Normally, selling stocks that are held in a brokerage account can trigger a taxable event when there are unrealized capital gains. As an alternative, you or a financial advisor can write a letter of instruction to a bank or brokerage, which can facilitate authorizing a transfer of shares to a charity. As financial advisors in Fort Mill, SC; we strongly recommend that you also coordinate these gifts with the charity. Many nonprofits have their own processes for receiving gifts.
This type of transfer can accomplish three things:
- You can manage 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.
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. Make sure you verify how this can work with a financial professional and the charity.
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.
Check Your IRA
If you are over the age of 70 1/2, there is a special rule within the tax code that refers to a Qualified Charitable Distribution. Prior to the SECURE Act legislation, retirees were required to begin taking distributions from their qualified retirement accounts once they reached age 70 1/2. The SECURE Act legislation pushed the RMD age back to age 72; but it didn't address the Qualified Charitable Distribution provision.
At the time of this writing, people who are age 70 1/2 and older are allowed to send distributions from their IRA directly to a qualified charity. We encourage you to work directly with a tax professional or a financial advisor to make sure this strategy applies in your situations. Some details, like only being able to use an IRA for this type of distribution, are too important to miss. Make sure you are prepared to be both a wise and generous giver.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. 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 a solicitation for the purchase or sale of any security.