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 tax benefits for both you and your chosen charity.
Research Charitable Organizations
Maximize the impact your monetary donation can have by selecting reputable and transparent organizations. A qualified charity will have 501(c)(3) status, indicating it’s federally recognized as a non-profit organization. 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 in regards to charitable giving. For example, some employers will match employee donations to certain organizations.
Consider Itemizing Your Deductions
To deduct charitable donations, you must itemize them on an IRS Schedule A form. To do this, you’ll need to keep track throughout the year of each donation made to a charitable organization. In most cases, the charity can provide you with a form to document your contribution. If the charity does not have such a form handy (and some do not), you may be able to use other forms of proof including:
- Credit or debit card statements
- Bank statements
- Canceled checks
When reporting deductions, 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 income tax deduction, so be sure to check on the standard deduction amount for your tax filing status.
Make Non-Cash Donations
Many charities welcome non-cash donations. In fact, donating an appreciated asset can be a tax-savvy move.
For example, you may wish to explore a gift of highly appreciated securities. Selling securities can lead to a taxable event. As an alternative, you or a financial professional can write a letter of instruction to a bank or brokerage, which can facilitate authorizing a transfer of shares to a charity.
This transfer can accomplish three things:
- You can manage 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? 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.
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 have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications.
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.
Generosity and giving back brings arguably one of the biggest emotional benefits that comes along with wealth and prosperity. Who doesn't love the feeling of blessing someone who is in need? Our human emotions are wired to help others. Studies have shown the psychological and social benefits it has on not only the well-being of those receiving the gift but also those giving it.
The Bible has plenty to say about giving back as well. Proverbs 19:17(MSG) says, "Mercy to the needy is a loan to God, and God pays back those loans in full." While we may not be able to directly measure a return on this investment in terms of dollars and cents, we can still rely on the return coming back to us in a variety of different ways. When it boils down to it, prosperity involves much more than financial gain. When our physical, mental, emotional, and social lives improve as a result of our actions, we are living a prosperous life. You might be surprised at just how well your financial life prospers as well.
Evergreen Financial Group is a Fee-Only Financial Planning and Investment Firm located in Billings, MT serving clients in Montana, Wyoming and virtually across the country. Evergreen Financial Group specializes in working with Christian families, including young professionals, Current and Future Retirees and Church Staff Members.
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