Merry Christmas 2023
Good news: you got a year-end bonus. Bad news: it's taxable income

6 tax-smart ways to make year-end charitable contributions

Cats in box commenting on Boxing Day
Even if you're not a cat, you can appreciate Boxing Day as a way to help others by making charitable donations.

Happy Boxing Day!

This holiday isn't formally celebrated in the United States, but many people around the world embrace the day after Christmas as a way to keep the season of giving going a bit longer.

There are many explanations as to how Boxing Day, and its name, came to be.

One commonly accepted origin story is that when it began in the United Kingdom during the Victorian period, household servants 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. He is celebrated for giving money to the poor. So another Boxing Day theory is 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 is an official holiday in many global locations. Even though it's just another day in the United States, it's a good time to be mindful of your Merry Christmas and share your good fortune.

Here are six ways to give on Boxing Day and the other 364. Or, in Leap Years like 2024 that is just days away, the other 365.

1. Cash donations. This is how most of us give, regardless of whether we itemize. In Internal Revenue Service parlance, cash means actual currency, as well as paper checks and credit card donations.

As long as you hand over the literal cash, date the check Dec. 31, or make the credit card gift by the last day of the year, it counts as a donation, and potential deduction, for 2023.

The timing also applies to gives made by popular electronic transfer options. Funds transferred by Automated Clearing House (ACH) and online payment apps must be made by midnight, your time zone, on Dec. 31 to qualify as a 2023 tax deduction.

2. Give appreciated stock. If you're finally 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.

There are two things to note. You must donate stock or other assets that have increased in value. And that increase must be from long-term gains 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 tax 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.

Also, if you want to donate appreciated assets, call your broker or financial adviser now. Although the tax code says donations can be made by Dec. 31, financial transactions must be made during business days and the last one of 2023 is Friday, Dec. 29.

3. Turn your RMD into a QCD. Older investors have another asset donation option. You must make required minimum distributions (RMDs) on tax-deferred retirement accounts. The RMD trigger age was 72 in 2022, but more retirement law changes pushed it to 73 for 2023.  once you turn 73. In 2033, the RMD age increases to 75.

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. Tax year 2024 planning note: the QCD amount goes up to $105,000.

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.

Finally, if this is an option that appeals to you, the timing advice from giving tip #3 above applies here: contact your IRA trustee now. Again, the tax code's Dec. 31 donation deadline is moot when you must make the actual QCD transfer by Friday, Dec. 29, last business day of 2023.

4. Give gently used household goods. We all have some apparel that, shall we say, is a bit snug. And parents know that growing children goes through clothes like Kleenex. If you know you'll never follow through on your upcoming New Year's resolution to drop those added pounds, admit it now and fit into those slacks again, and you don't have family or friends who can take the youngsters' hand-me-downs, then give them all to your favorite charity.

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 tortilla maker you never used (H-E-B's are great and much easier), 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 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.

5. 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.

6. 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 many established charities will accept donations of digital assets.

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 as I understand it, the biggest downside of donating cryptocurrency is the potential fees and logistics.

Such considerations are covered in Megan DeMatteo's recent CoinDesk story Crypto Philanthropy 101: What Donors and Organizations Need to Know.

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 four are —

  1. Don't miss the Dec. 31 end-of-tax-year deadline. For the third and final time, note that some gifts (options 2 and 3 above) involve transactions that must be accomplished by the last business day of the tax year. That's Friday, Dec. 29.
  2. Make sure your charity is IRS qualified. These typically are groups that have received the 501(c)(3) tax status designation from the IRS.
  3. Substantiate your gifts with documentation. Most charities will send you a receipt. In most cases, these receipts aren't required to be submitted when you file your tax return. But if an IRS examiner has follow-up questions, your paperwork can make the answers much easier.
  4. You must itemize your donations on Form 1040 Schedule A. If you find claiming the standard deduction is a better tax move than itemizing, then your gifts won't do you any tax good. That doesn’t mean you shouldn't give. Just don't expect any tax benefit for you generosity.

You can read more about the Internal Revenue Code and IRS rules in my post, 6 tax donation deduction tips for Giving Tuesday.

Regardless of how you're able to give, thanks for thinking of others during the holidays and beyond.



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