Each year, our team of financial advisors receives a plethora of questions about the best strategies for end-of-year giving to non-profits and faith groups. In this article, you will find some of the most common inquiries that we encounter.
As the name suggests, charitable giving is the act of donating money, goods, services, or time to support organizations, causes, or individuals in need. Contributions can take many forms, including monetary donations, in-kind gifts, volunteering, planned giving through assets or wills, and corporate initiatives.
Year-end charitable giving — donations made during the final months of the calendar year, particularly in November and December — is significant because many individuals and organizations aim to maximize their tax benefits before the year's close, as donations to eligible charities can often be deducted from taxable income.
Watch the video to learn more about year-end charitable giving strategies, or keep reading:
The amount of charitable giving that is tax-deductible depends on the type of contribution, the recipient organization, and your income level. Here are some general guidelines:
Always ensure the recipient is a qualified 501(c)(3) organization, and retain proper documentation to substantiate your claims. For tailored advice, consult a tax professional or reference IRS guidelines on charitable contributions.
The following three forms of giving do not qualify as tax-deductible even though they are needed and appreciated by the recipient.
Yes, or almost always, is perhaps the technically correct answer.
Giving money away does help reduce your taxable income and generally will reduce your tax liability. However, this brings up a caveat regarding the difference between charitable giving deductions and credits.
A tax credit is when the IRS gives you a dollar-for-dollar offset for the money you have used or spent on a qualifying tax credit type of program. For example, if you use $2,000 of expense towards something, it’s treated as a tax credit, meaning that it offsets dollar-for-dollar $2,000 worth of taxes.
Donating money to charities is not a charitable giving tax credit; it's a tax deduction. This means that when you give away, for example, $10,000 to a charity, it reduces your taxable income by $10,000. Suppose you are in the 30% bracket. Then it would save you $3,000 worth of taxes.
Giving money to charity, a qualifying 501(c)3, a church, or a synagogue, will typically qualify you for a tax deduction and reduce your tax liability in that way.
Keep in mind that for those who do not itemize their deductions, donating money will not increase your tax deductions.
If you're interested in diving in deeper to learn the difference between standard deductions and itemizing deductions, you'll want to ask your CPA or do a little Google search on your own. Suffice it to say that for most of you who fall into a higher income tax bracket, you'll find a tax benefit from donating money before the end of the calendar year.
Charitable giving can reduce taxes by allowing you to deduct the value of your donations from your taxable income. The extent of this reduction depends on several factors, including the type of donation, your filing status, and the nature of the recipient charity.
To maximize tax benefits, consider consulting with a tax advisor to better understand the specific limits and strategies for your situation.
Donations of cash need to be postmarked by December 31st to count for this calendar year.
You can write a check on New Year’s Eve as long as the post office is open, and they can postmark the envelope. It's generally a best practice to try and do it a few days before or even wire the funds, but you can do that until the end of the year.
You cannot make donations up until April 15th and receive a retroactive deduction as you can for IRA contributions or other types of tax programs.
In addition to your 401(k)s, IRAs, Roth IRAs, and retirement accounts, many of you have an after-tax investment portfolio. If that investment portfolio includes stocks or mutual funds, it's fairly likely, given the market performance over the last couple of years, that you have unrealized appreciation.
Unrealized appreciation is different from realized appreciation.
As we approach the end of the year, suppose you are contemplating making a charitable contribution from either cash or investments in a taxable investment account. It's almost always better to give away the appreciated assets.
When you give away an investment with unrealized gain, you get the same deduction based on the fair market value as you would for donating an equivalent amount of cash. However, you avoid having to pay capital gains tax on the appreciation when you sell it. The charity you donate the stock or mutual fund to also does not have to pay capital gains tax when they sell it.
For example, let’s say you are inclined to make a $10,000 donation at the end of the year. If you give away cash, you will receive a tax receipt for $10,000, which would presumably be deductible if you qualify.
Instead, if you give $10,000 of stock, in which you invested $5,000, the not-for-profit will receive $10,000 worth of stock and will almost always sell it right away, and they will not tax on the gains. They will then have the capital to use to further their mission or a supporting initiative that is a priority to them, and you will not have to pay tax on that unrealized gain.
If you want to keep your account or portfolio with the same kind of integrity or investment allocation, simply take the cash you could have given, put it back into the portfolio, and repurchase the same stock. That way, when you look at your account, you will have the same investments for the same value that it was, but it will now have a higher cost basis and no unrealized gain.
There is one caveat to this strategy: During periods of market volatility, some stocks and investments may still generate short-term gains, depending on when they were purchased.
Short-term gain is different than long-term gain by virtue of having owned an investment for less than 12 months. For example, suppose you bought stock in February, and by the end of the year, it's up significantly. It won't be beneficial to give it away because, in the case of a short-term hold, you can only deduct the cost basis for the amount you put into it. You don't get to deduct the fair market value with the significant gain.
To sum it up, giving away stock that has been held for more than 12 months and has appreciation is valuable. However, giving away stock you've held for less than 12 months, which has appreciation, is no more valuable than giving away cash. In addition, it may actually be less beneficial to give away short-term appreciated stocks than giving away an equivalent amount of cash.
As you put some thought into your end-of-year financial strategies, you can help a charity or church and also benefit your own tax situation. Donating money is a help to both the giver and the receiver, and doing so with appreciated securities is generally an excellent option to explore.
If you have questions about year-end charitable giving, please connect with one of our financial planners to discuss what options and strategies suit your specific situation best.
Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.
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Shane Tenny is the managing partner of Spaugh Dameron Tenny. Along with hosting the Prosperous Doc® podcast, Shane has a true passion for behavioral finance, helping clients and audiences understand how to develop successful strategies based on their unique temperaments. An accomplished and highly engaging speaker, Shane is regularly interviewed for television and podcasts, is actively involved in the Financial Planning Association®, and contributes to industry advisory boards.
