5 tax-smart alternative ways for cool cats to contribute to charities
Sunday, December 26, 2021
Happy Boxing Day!
While this holiday is not formally celebrated in the United States, many places across the rest of world embrace the day after Christmas as a way to keep the giving going.
The great image of felines' fixations on boxes notwithstanding, just how did Dec. 26 come to be known as Boxing Day? One widely circulated accepted origin story is that when it began back in the United Kingdom's Victorian times, the household servants of that era were given the day after Christmas off as an acknowledgement of the work they had done preparing the estate owners' holiday celebrations.
Another Boxing Day narrative is that it commemorates St. Stephen, who's honored on Dec. 26. St. Stephen was the first Christian martyr and is celebrated for giving money to the poor. That's led the Boxing Day theory that the day originated in his honor because Dec. 26 was the day on which churches opened their alms boxes and gave the proceeds to the poor.
Regardless of how it started, Boxing Day now is an official holiday in many parts of the world. And if you want to help popularize it here in the United States, I'm right there with you.
I'm also right here with some ways to give, on Boxing Day and the other 364, that aren't just the standard cash, check, or credit/debit card donations. The following five atypical charitable donations can help charities just as much and, in many cases, provide the donors with a tax break.
Give appreciated stock. If you're now reassessing your portfolio with an eye on making some investment changes, you also might want to look into a charitable way to rebalance your holdings. Donating appreciated assets that you've had for a while can benefit you and your favorite charity.
The keys here are giving away stock or other assets that have increased in value. And that increase must be from long-term gains, that is, on property, including stock, that you've owned for more than a year.
Why not just sell the asset, you ask, and then give the money to the charity? Wouldn't that make things easier for the nonprofit?
As to the first question, if you sell the long-term asset yourself, you'll have to come up with the taxes due on your capital gains. If, for example, you have a stock that's gone from being worth $1,000 when you bought it two years ago to $2,000 today, by selling it yourself, you'd owe capital gains tax on the $1,000 profit (I'm using simplified basis/profit amounts for illustrative purposes) at either the 15 percent or, if you're a higher-income earner, 20 percent. That would cut $150 or $200 out of the $2,000 that you would be able to donate to your charity.
As for question number two, most major nonprofits are equipped to deal with stock donations. The asset can be added to the organization's holdings and sold later when the group might have more of a need for the money. Or the organization can sell it immediately. So you're actually giving the charity more of a money managing choice. And trust me, the group would rather have the full $2,000 that the asset is worth rather than the $1,850 or $1,800 you have after the sale minus taxes. The extra amount can make a difference to a nonprofit.
Turn your RMD into a QCD. Older investors have another asset donation option. Required minimum distributions (RMDs) on tax-deferred retirement accounts returned this year for taxpayers who are age 72 or older (or 70½ for those required to take RMDs under the prior tax law. Regardless where you are in the septuagenarian RMD range, if you don't need the required amount to cover your Golden Years expenses, consider donating it.
This is accomplished as a qualified charitable distribution, or QCD, a direct transfer of funds from your traditional IRA or regular workplace 401(k), payable directly to a qualified charity. You can designate up to $100,000 in retirement account amounts as QCDs.
While a QCD won't get you an itemized charitable gift tax deduction, the donated retirement account amount counts toward satisfying your annual RMD. That means your generosity satisfies Uncle Sam's retirement withdrawal rule while simultaneously keeping the directly donated amount out of your taxable income tally at tax filing time.
Give gently used household goods. After a couple of years of reduced activity due to COVID-19 closures and self-isolation, most of us have some apparel that, shall we say, is a bit snug. If you know you'll never fit into those slacks again (yeah, the truth does hurt), or your youngster's growth spurt left you with a lot of not-or-ill-filling kids' clothes, give them away.
While you're filling up your car trunk with clothing, you might want to put some household items that you no longer use in there, too. This includes not only that crock pot that you never used, but also any furniture that didn't evolve with your decorating style.
But there are two things to keep in mind with these gifts.
First, make sure that the items you're giving away are in good or better shape. Your local church thrift shop or homeless shelter or charity drop off center are not dump grounds.
Second, if you're planning to claim the donations as itemized charitable deductions, make sure you properly value them. The charity that takes you goods will give you a receipt, but it's up to you to determine what the items are worth. The Internal Revenue Service offers some guidance in IRS Publication 561, Determining the Value of Donated Property. Basically, you can claim the donated item's fair market value (FMV) on the date of the contribution.
My older post on valuing your donated household goods also has more. You also can check out thrift store or garage sale prices on comparable goods, use one of the many software programs or apps, or check out valuation guidelines provided by Goodwill and the Salvation Army.
Donate an old auto. Don't forget to check your garage for potential donations. I not talking about boxes of other old items stored there. I'm talking about that auto you haven't driven in years.
Lots of folks sell their old cars themselves. They like pocketing the extra cash. I don't. I mean, I'd love the cash, but I don't want to mess with strangers coming to my house and checking out my vehicle. So the hubby and I usually trade in our old autos. One year, though, we donated a car. Although auto donations are not as easy from the tax standpoint as they were way back when we did so, vehicular gifts still are a viable philanthropic and tax-saving option.
Basically, auto donation tax law now says the amount that you now can claim as an itemized charitable deduction depends in part on how the charity uses the vehicle. Generally, you're limited to a $500 deduction. But if the organization sells the auto, your deduction depends on the price that the nonprofit got for the auto. You'll get a firmer idea of your potential tax break when the charity sends you the IRS-required statement with the details so that you'll know how large a deduction you can claim. So, auto donors essentially are giving away the machine without a firm idea of its tax value at donation time.
Still, the car — or truck or boat or other motorized vehicle — donation option remains. And some folks (like me) find donating is preferable to selling a jalopy and then having the new owner keep bugging them about issues with the vehicle.
Give crypto. OK, as long-time readers know, despite my posts on cryptocurrency and taxes, I'm a say it with cash kind of gal. But if you're into digital currencies, and are feeling flush and philanthropic, then there are ways you can donate crypto.
Kate Dore, a Certified Financial Planner, notes in a recent CNBC online article that donations of bitcoin and the myriad other types of cryptocurrency to charity are booming, in part thanks to the asset's unprecedented growth over the past year. The gifts, like other asset donations, mean that crypto investors may still bypass capital gains taxes on profitable assets while simultaneously scoring a tax write-off if they itemize deductions.
But before contributing Cardano et al, check out Dore's story on what you need to know before donating cryptocurrency.
Follow Uncle Sam's donation tax rules. Finally, remember that whenever or whatever you're donating, the general tax rules for giving apply. The big three big are —
- Don't miss the Dec. 31 end-of-tax-year deadline.
- Make sure your charity is IRS qualified.
- Substantiate/document your gifts.
You can read more about the Internal Revenue Code and IRS rules in my earlier post, Charitable donation tax deduction rules apply on Giving Tuesday and year-round.
And regardless of how and when you're able to give, thanks.
You also might find these items of interest:
- 4 enhanced tax-deductible donation options this year
- 5 ways to determine whether a charity is naughty or nice
- 10 financial holiday gifts, including some with tax advantages
- Helping others this Thanksgiving by giving to seasonal (and beyond) charities
- Don't miss out on $300 ($600 for couples) charitable donation tax deduction, no itemizing needed
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