Edited: 23rd May 2021
As part of your holiday season of giving, consider giving to a favorite charity. It can also serve as part of your year-end tax planning. Additionally, we all want our money to go further, and charitable donations are no exception. Here are some tips to ensure that your donation makes the biggest positive impact:
1. Proactively research charities.
Identify the causes that are most important to you and your family. Do some research on those organizations that match up with your values. Then make sure the charity you donate to is a good steward of your resources.Websites like Charity Navigator and Charity Watch track the financial health and effectiveness of charities. Effective charities spend 75% or more of their resources on their services and 25% or less on fundraising and administrative costs.
2. Focus your support.
Once you find a charity that meets your requirements, donate to it over time and let it know you are doing so. Repeat donations from a reliable donor saves your chosen charity money because it doesn't have to keep sending solicitations to you every year.3. Do not give over the phone or via email.
It is often best to avoid donating over the phone or via email solicitations. These are two common ways thieves target their victims. In addition, charitable telemarketing campaigns generally use for-profit fundraisers who take a percentage of your gift. This means the charity often receives substantially less of your donation if you give over the phone.Instead of reacting to a phone call or email, plan what charity you wish to give money to and contact the organization directly to make your donation.
4. Ensure your donation is deductible.
If you plan on itemizing your deductions on your tax return, determine if the organization you're donating to is designated by the IRS as a 501(c)(3) organization in good standing. Many smaller organizations will represent themselves as a qualified charitable organization but have not kept their non-profit status up to date. You can check the IRS’s Tax-Exempt Organization Search page for a full list of qualified organizations.
Reminder: Cash donations $250 or more require a written acknowledgment from a qualified organization in addition to your canceled check or bank receipt. It should indicate the cash amount or description of any property you contribute.
5. Share your intentions.
Whether your donation is a one-time gift or part of a long-term commitment, check to see if there is an opportunity to match your donation. Oftentimes employers will match your donation or others will promote a matching program. Also tell friends of your charity's efforts. Every little bit helps.6. Consider qualified direct contributions from retirement accounts.
If you are 70 1/2 or older, you can contribute up to $100,000 directly from your IRA. This can be a great way to meet your minimum required distribution, and you will avoid some ordinary income taxes.7. Consider donating stock to yield bigger tax savings.
Regardless of how you make your payment - credit card, debit card, EFT, or mailing a physical check - your donation is considered a cash contribution. Instead of making a cash contribution to a charity, you could instead make a stock contribution and see a potentially larger tax deduction.Case Study
To illustrate, assume you purchased stock in 2015 for $10,000 and donated the stock in 2020 when the fair market value was $15,000. Below are three different scenarios and their tax implications assuming your marginal income tax rate is 37% and your long-term capital gain rate is 20%.- 1) Donate cash instead of selling stock. Donating $15,000 of straight-up cash to the charity decreases your taxes by $5,550 if you itemize deductions. You get a charitable contribution tax deduction equal to the fair market value of the stock when it is donated, which in this example is $15,000. Your income tax savings is 37% of $15,000, or $5,550.
- 2) Sell stock and donate the proceeds. Selling the stock and then donating the cash proceeds reduces your tax liability by $4,550.
Here’s calculation:
· Income tax savings = $5,550 (37% of $15,000)
· Capital gains taxes paid = $1,000.
Selling the stock first means that you have to pay taxes on the gain. Your tax liability is 20% of $5,000. - 3) Donate the stock directly to the charity. Donating your stock directly to the charity cuts your tax bill by $6,550!
Here's how it works:
· Income tax savings = $5,550 (37% of $15,000)
· Capital gains tax savings = $1,000.
By donating the stock, you do not owe long-term capital gain taxes. This saves 20% of the $5,000.
In summary, if your situation is similar to this case study, directly donating stock to a charity can potentially save you $6,550 in taxes, compared to $5,550 if donating straight-up cash and $4,550 if selling the stock then donating the proceeds.
Donating stock directly to a charity is slightly more complicated than donating cash and requires you do it correctly. If you're considering making a donation of stock to a charity, please check with your tax advisor.
*** 2020 New Tax Breaks Help Your Favorite Charity & You
The CARES Act authorizes several new tax breaks for charitable donations in 2020. Here are three additional ways to help your favorite charity while receiving a tax break:8. Donate up to $300.
More taxpayers are claiming the standard deduction instead of itemizing deductions thanks to the 2017 tax reform, which means that charitable contributions aren't tax-deductible for many Americans. The CARES Act, however, allows an above-the-line deduction of up to $300 for donations to qualified charities other than donor-advised funds (DAF) or private foundations. In other words, you get a deduction whether you itemize or not. Any disallowed contribution is carried forward for five years.9. Donate up to 100% of AGI.
The CARES Act also creates a tax incentive to donate as much of your 2020 income as you feel like giving. The annual deduction for monetary donations is normally limited to 60% of adjusted gross income (AGI). But the CARES Act increases this threshold to 100% of AGI. You can therefore effectively donate as much as you earn. This provision also doesn’t apply to either DAF or private foundation donations. Any disallowed contribution is carried forward for five years.10. Businesses can contribute more!
Businesses can also increase their giving thanks to two different provisions in the CARES Act.- First, it raises the usual limit for corporate donations from 10% of taxable income to 25%.
- Second, it boosts the threshold for a special enhanced deduction for gifts of food from 15% of taxable income to 25%.
- Under both provisions, any disallowed contribution is carried forward for five years.