Making a charitable donation at the end of the year–or any time of year–can be a win-win-win.
The organization you give your money to benefits. You get to enjoy the good feeling that comes with supporting a project or cause that you believe in. And, you may also be able to lower your tax bill.
This year, the rewards for giving may be especially sweet. Two new tax changes for 2021 can boost donors’ tax deductions for charitable giving, meaning they may be able to give more to charity at a lower net cost.
Here are some things you may want to consider when planning and making your end-of-year charitable donations.
What Qualifies as Charitable Giving?
In the eyes of the Internal Revenue Service (IRS), a charitable donation is a gift of money, property, or other asset that you give to a qualifying organization, known as a 501(c)(3). To find out if an organization you’d like to support is eligible to receive tax-deductible contributions, you can search for it on the IRS’s database .
You may want to keep in mind that money or assets given to political campaigns or political parties do not qualify as tax-deductible donations. In fact, no organization that qualifies as a 501(c)(3) can participate in political campaigns or activities.
Organizations that engage in political activities without bias, however, can still sometimes qualify. So, a group can educate about the electoral process and remain within guidelines. They just have to go about it in a nonpartisan way.
It’s also possible for the IRS to implement measures that can affect charitable donating. For example, there was a tax relief provision passed in the form of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
Under it, tax deduction limits shifted for both those individually and jointly filing. So, it’s essential to stay updated on current tax laws and provisions that may affect your charitable donations’ taxation.
Recommended: IRA Tax Deduction Rules
Can I Deduct My Year-End Charitable Donation?
In the past, charitable donations could only be deducted by tax filers who itemized their deductions. That means that rather than take the standard deduction, they chose the more complicated path of listing all of their eligible expenses.
However, the IRS has a special new provision that will allow individuals to easily deduct up to $300, and joint filers to deduct up to $600, in donations to qualifying charities in 2021, even if they don’t itemize.
This is basically an enhancement of the one-year tax break Congress put in for 2020 under the (CARES) Act that allowed a tax deduction for cash gifts to charity up to $300.
The difference is that for 2020, the deduction was limited to $300 per tax return. The new provision allows a married couple filing jointly to deduct up to $600 in cash gifts to charity for 2021.
The rules have changed for people who itemize as well. If you are itemizing on your return, the IRS has increased the limit for charitable tax deductions from 60% to 100% of your adjusted gross income (AGI). And, if you want to give more than that 100 percent threshold, the excess can be carried over into the next tax year.
Whether you’re looking to give $50 to your favorite local organization, or you’re considering a much larger charitable donation, these tax changes make it a particularly good time to do so.
Tips for Making End-of-Year Donations
To make the most of a charitable donation, here are some strategies you may want to keep in mind:
Making a Timely Donation
The deadline for charitable donations is December 31st. If you’re looking to deduct the donation in the current tax year, you will want to make sure your charity has ownership of whatever asset you are donating by the closing of business on the 31st. You may also want to make sure that your preferred payment method is accepted by the charity so it doesn’t get kicked back and cause delays.
Taking Advantage of Company Matching Programs
Your place of employment might have a matching program for charitable giving. They might, for example, match your donation amount dollar for dollar up to a certain amount. If so, it could significantly bump up the amount you could otherwise afford to give.
If you’re unsure about whether your company has a program, it can be worth reaching out to your HR department for further information.
Giving Rewards on Your Credit Card
If you are giving on a budget, you might consider donating rewards you earn on your credit cards, such as hotel points or airline miles. This can be a great way to use points or other rewards that would otherwise just expire. Many credit card companies, hotels, and airlines will make it easy to give your rewards to nonprofit organizations.
Donating Assets from your Brokerage Account
If you’re looking to lower your capital gains tax, you may want to consider donating assets from your brokerage account to a nonprofit. This may take some time and planning, but the benefits of donating an over-allocated position that’s outperforming can be worth it.
You may be able to receive tax advantages and rebalance your portfolio, while also helping an organization increase its assets.
Setting up a Recurring Donation
You can get a headstart on next year by creating a recurring contribution now. Many organizations allow you to donate monthly through their websites using a credit card, so you might be able to earn rewards at the same time. By establishing your donation plans now, you won’t have to even think about end-of-the-year giving next year.
Keeping Good Records
If you want to deduct your donation on your taxes, you’ll want to make sure you have the right receipts to back up the transaction.
For cash donations under $250, you’ll either need a bank record (like a canceled check or bank statement) or a written acknowledgment from the charity which includes the date and amount of your contribution.
For cash donations over $250, a bank record isn’t insufficient. Instead, you’ll need something in writing from the charity which includes the date and amount of your donation.
Noncash donations from $250 to $500 in value require a receipt that includes the charity’s name, address, date, donation location and description of items donated. If the noncash donation exceeds $500 in value, you’ll also need a record of how and when the items were acquired and their adjusted basis.
If the donation exceeds $5,000 in value, you’ll need to get a written appraisal from a qualified appraiser.
Speaking with a Professional
An accountant can help answer any questions you may have about how the new tax laws will impact your tax contribution, as well as help you make the most strategic and efficient charitable donation.
Giving can be a good idea for a number of reasons, especially in 2021. In addition to helping a nonprofit organization meet its operating costs for the year, you can feel good about what you are doing with your money, and you may also benefit from special tax deductions.
Giving can also help you get the new year started on the right foot. If you’re looking for other ways to get your financial life in order (now, or any time of year), you may also want to consider signing up for SoFi Money®.
SoFi Money is a cash management account that allows you to earn competitive interest, spend, and save all in one place. And, since you won’t pay any account fees or other monthly fees, you can focus on putting your money towards more important things.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.