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 Was a Particularly Good Year for Charitable Donations
In light of needs generated by the COVID-19 pandemic and increased demand on charities, 2020 was an exemplary year to donate.
The pandemic led to the signing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which expired at the end of 2020. The CARES Act allowed you to take a $300 deduction for cash donations to qualifying organizations, even if you don’t itemize. Qualifying organizations had to 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 lowered your adjusted gross income (AGI) and taxable income.
Use the IRS’s Tax Exempt Organization search tool to ensure an organization qualifies before contributing.
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 2021 taxes, you must make contributions by Dec. 31, 2021. In a standard year, people who choose to take the standard deduction cannot claim a deduction for their charitable contributions. But a special tax provision announced by the IRS now permits taxpayers to deduct up to $600 in donations to qualifying charities on their 2021 federal income tax return.
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
To offset IRA taxes, one option is to give up to $10,000 from your IRA directly to a qualified nonprofit by Dec. 31. This is also called a qualified charitable distribution (QCD). Generally, a QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity.
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 2021 return.
If You Don’t Itemize
The law now allows individuals to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations. These individuals can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married individuals filing joint returns.
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.
According to the IRS, once the donor makes a DAF contribution, the organization itself has legal control over it. However, the donor, or their representative, maintains advisory privileges in regards to the distribution of funds and the investment of assets in the account.
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.
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.
The Bottom Line
Giving is a good idea for a number of reasons. 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.