This year has been challenging. The COVID-19 pandemic shut down many economic sectors, leading to increased unemployment and surging food insecurity. According to the Nonprofit Finance Fund, many nonprofits are struggling under increased demand for services and decreased support (due to canceled fundraising events and reduced donations). If you’ve remained financially stable, or if charitable giving is important to you, your year-end donations could be critical to a number of struggling nonprofits.
We’ll outline benefits of year-end giving—along with great ways to achieve your goals.
Why 2020 Is a Particularly Good Year for Charitable Donations
In light of needs generated by the still-ongoing COVID-19 pandemic and increased demand on charities, 2020 is a perfect year to donate.
The pandemic led to the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, set to expire at the end of 2020. The CARES Act allows you to take a $300 deduction for cash donations to qualifying organizations, even if you don’t itemize. Qualifying organizations must have charitable, educational, religious, literary, or scientific purpose—and be classified by the Internal Revenue Service (IRS) as tax-exempt.
According to the IRS, that $300 donation lowers your adjusted gross income (AGI) and taxable income.
Use the IRS’s Tax Exempt Organization search tool to ensure an organization qualifies before contributing.
The CARES Act encourages big-dollar donations, too, by temporarily lifting the typical limit on deductions for those who itemize. Previously, donors could deduct donations on up to 60% adjusted gross income (AGI). In 2020, it’s possible to deduct up cash contributions of up to 100% of AGI. If you wish to give away your entire year’s income, it’s possible to do so in 2020.
However, few will benefit from this temporary lift—mainly wealthy older adults with low annual incomes who aren’t dependent on their retirement funds.
Also, 2020’s stock market growth may mean you have more to give in appreciated assets.
Many states also offer tax deductions for charitable contributions, or have their own tax-related laws. Speak with a tax attorney or professional about your situation.
Reasons to Make Year-End Charitable Donations
Good reasons to give at year’s end include the following, ranging from financial advantages to personal satisfaction.
#1 Take Advantage of Employer Matching
Some employers match charitable donations, although they may place limits and deadlines on charitable matches, such as Dec. 31. You might be able to get a match even if you’re not currently an employee—many employers match donations given by an employee’s spouse or a retired employee.
Some companies match at rates of two or three times what’s given by an employee. Check with your HR department to find out your company’s rules and match rate.
#2 Generate Tax Deductions
To count toward your 2020 taxes, you must make contributions by Dec. 31, 2020. In a standard year, you can only deduct charitable donations if you itemize deductions. But this year, you can deduct donations up to $300 even if you don’t itemize. If you contribute more than $300, you can only deduct the excess by itemizing deductions, although most taxpayers take the standard deduction.
#3 Give to Gift
Most organizations offer a way to give in honor of someone else. This can be a great way to take care of last-minute holiday gifts, especially for someone hard to shop for. However, it may be up to you to tell your honoree by card. Check with the site or charity to find out.
Some conservation organizations provide “symbolic adoptions” along with a certificate and plush toys, so there are physical (and wrappable) gifts, in addition to your monetary donation.
#4 Offset IRA Taxes
This year, the CARES Act waived required minimum distributions for most retirement plans, for those over age 70 ½.
Another option is to give up to $100,000 from your IRA directly to a qualified nonprofit by Dec. 31. This is also called a qualified charitable distribution (QCD). Although taking the minimum distribution isn't required in 2020, a QCD is a way of giving during any year, without facing the normal tax consequences of an IRA distribution.
Speak with a tax or personal finance professional about the particulars of your situation, especially where taxes and retirement funds are concerned.
The Best Ways to Donate for Tax Purposes
The best way to donate depends on what you’re trying to achieve—whether it’s a quick gift or a larger tax deduction for your itemized 2020 return.
If You Don’t Itemize
Give cash before Dec. 31 to claim the $300 CARES Act deduction. Or you could donate appreciated stocks or other securities to an organization, to potentially avoid paying capital gains on the appreciated amount. However, you can’t deduct the stock’s value from your taxes or claim the CARES deduction.
If You Do Itemize
If you plan to itemize, you can donate mutual funds, cash, or other items before Dec. 31 to qualified charities.
“As stock values have gone up, now may be a good time to donate if you have a legacy stock holding that has appreciated in value,” explained Roger Ma, a New York City-based founder and financial planner at lifelaidout and author of “Work Your Money, Not Your Life.”
“You can donate the security and get the stock’s full value as a tax deduction, without paying capital gains,” he says.
Or, you may be interested in more sophisticated ways of giving that pair tax benefits with the satisfaction of helping causes important to you.
For example, a donor-advised fund (DAF) could be a good fit if you’re charitably inclined, itemize deductions already, and are in a high tax bracket, according to Ma. A DAF is like a charitable investment account, and can be a tax-efficient way to manage appreciated assets and larger contributions. You could also give assets like stocks, bonds, and restricted stock from your employer.
DAF giving does not fall under the CARES Act’s temporary suspensions, and neither does donations of goods and other non-cash contributions. Only cash donations are deductible if you don’t itemize.
Beyond cash and securities, you can give household items, too—if you itemize the used goods you give away, Goodwill’s guide to estimated values can help.
Donating used items keeps them out of the waste stream and provides usable items for people on a budget—which could be especially valuable this year. According to data from ShopperTrak, a retail analytics firm, overall customer traffic to Goodwill stores was up this year between May and August.
Depending on your contribution, you may need a receipt from the receiving organization or need to fill out a special tax form. Check with your tax preparer for more information.
If your mid-April panic-buying spree led to too many tissue boxes or pallets of toilet paper, many organizations accept new-condition toiletry and hygiene items as well.
The Bottom Line
Giving is a good idea for a number of reasons, especially in 2020. In addition to effectively spreading the wealth, you can improve your own circumstances and sense of well-being by benefiting from special tax deductions and clearing your space. Plus, it’s a great way to start off on the right foot for the new year.