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 benefits for both you and your chosen charity.
Research Charitable Organizations
Maximize the impact your gifts can have by selecting reputable and transparent organizations. Most qualified charities will have 501(c)(3) status, indicating they are federally recognized as a non-profit organization eligible to receive tax deductible contributions
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 deductions when you file your tax return. To do this, you’ll need to keep track of each donation you made throughout the year to a qualifying charitable organization. If you want to deduct $250 or more the charity must provide you with a form to document your contribution. For larger donations, 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 deduction, so be sure to check on the standard deduction amount for your tax filing status. However, if you do choose not to itemize, claiming the standard deduction instead, you can still deduct up to $300 ($600 if married filing jointly) for donations to qualifying charities during 2021.
Make Non-Cash Donations
Many charities welcome non-cash donations. In fact, donating an appreciated asset can be a tax-savvy move.
For example, instead of selling a stock, triggering a taxable gain and giving away the net proceeds, you may wish to make an in-kind gift of the actual shares of stock that you own that have increased in value.
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.
Utilize Your Life Insurance Policy
Do you have a life insurance policy that you no longer need? 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 often have significant expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications.
Consider a Donor Advised Fund
If you would benefit from the deduction today but want to give the money to charity in the future, even years in the future, consider a donor advised fund. This is a great way to set money aside for charitable giving in retirement in your final years of working when you are still in high tax rates and Uncle Sam will share the cost.
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.
| Mike Hengehold, CPA/PFS MST RICP®
Mike is the Founder and President of HCM Wealth Advisors. Over the last 30 years, he’s provided financial planning guidance to a myriad of families to help them realize their financial dreams. Mike is an avid homebrewer and animal lover, and when he’s not at work you can often find him on the golf course working on his short game.
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.