About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C., area who works with clients virtually across the country. Dream Financial Planning is a Fiduciary Financial Planning firm specifically designed to help individuals in their 30s and 40s take control of their finances and fulfill their dreams. Feel free to schedule a Free Consultation to learn how we use the DREAM Financial Planning Process ™ to help our clients achieve their goals.
Whatever your reason for giving this year, it’s important to know how your charitable contributions can impact your financial plans. In fact, being strategic and intentional with your charitable contributions can create tax benefits for both you and your chosen charity.
This checklist will help guide you as you consider and implement a charitable giving strategy. It covers:
- Philanthropic motivations and goals
- Cash flow considerations
- Asset selection when funding gifts
- Charitable giving vehicles
- Tax planning and deductibility
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 that it is federally recognized as a non-profit organization.
Third-party websites like Charity Navigator, Charity Watch and Give Well offer unbiased, independent ratings and evaluations of charitable organizations. These sites can offer important insights into how donated money is distributed. If you’re considering making a sizeable donation, it may also be helpful to speak directly with the chosen charity to discuss how the gift will be used.
If you haven’t already, check with your employer about what opportunities they provide regarding charitable giving. For example, some employers will match employees’ donations to certain organizations.
Consider Itemizing Your Deductions
To deduct charitable donations, you must itemize them on an IRS Schedule A form.1 To do this, you’ll need to keep track of each donation you make to a charitable organization throughout the year. 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 consider gifting highly appreciated securities. Since selling securities can lead to a taxable event, it may be wiser to transfer appreciated securities directly to your charity of choice.
Such a transfer can accomplish three things:2
- 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 may 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.3
If you continue to pay premiums after making the gift, doing so could also reduce the size of your taxable estate. The death benefit may be transferred out of your taxable estate, in any case.
Consider determining whether you are insurable before implementing any 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 your age, health status, 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 may also have to pay surrender charges, and there may be income tax implications.
Whatever your situation, getting advice from a tax or other 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.
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Revocable Living Trust-Based Estate Plan
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Tax preparation is now part of the ongoing financial planning program. This will be in addition to the Tax Report we already generate for clients and our work with the IRS Withholding Calculator to help prevent our clients from getting a surprise tax bill.
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Paying for College
This service is an ideal fit for parents of high school juniors and seniors with a standardized test score (ACT/SAT) and a list of colleges they're considering. This is included as part of ongoing financial planning or as a stand-alone package. This service includes:
- A college affordability assessment
- How Much Colleges Think You Can Afford (EFC)
- If You Qualify for Need-based Grants
- If You Qualify for Merit-based Scholarships
- Help you search for scholarships
- 1 Year Out of Pocket Cost (For Each College)
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