As we approach the end of 2020, nonprofit donors need to be made aware of certain tax-related situations, outlined below.
Timing of Donations
Charitable contributions are considered made on the date the donor gives up ownership and possession of the gift. For contributions to be considered made in 2020, the donation must be made by midnight on Dec. 31.
For donations by check, a mailed donation must be postmarked by Dec. 31. The use of a postage meter is no guarantee of a year-end donation if the envelope is not postmarked by that date. A check dated Dec. 31, 2020, but placed in the offering plate on Sunday, Jan. 3, 2021, must be recorded as a 2021 donation.
For many nonprofits, most donations are received online paid by credit card. Donations by credit card are deductible in the year the charge is processed, not the year in which the donor pays the credit card bill.
Donations of Securities
As of the date of this publication, the stock market is at an all-time high. The Dow Jones Industrial Average is over 30,000 points. If a donor sells stock that has increased in value, the gains on the sale may be subject to capital gains taxes, which could be as much as 20%. By donating these stocks instead of selling, the donor not only avoids the capital gains tax, but is able to take a charitable deduction for the value of stock as of the date of the gift.
It has been reported that President-elect Joe Biden wishes to increase the capital gains tax rate to 40% for persons who make more that $1 million annually. This is a good time for donors to review their holdings with advisors and make decisions about possible donations of securities.
Another tool to consider is the use of a donor-advised fund. Donating to a donor-advised fund allows a donor to take a deduction now and then provide support to chosen charities over time.
Donations from IRAs
Funds from a traditional individual retirement account (IRA) may be used for charitable donations if handled properly. This is referred to as a qualified chartable distribution (QCD). IRA owners aged 70½ or older who make a QCD directly from a traditional IRA may donate up to $100,000 without it being considered a taxable distribution.
The donor of IRA funds may not also claim the donation as a deduction on their tax return. Other donations of non-IRA funds may still be claimed as itemized deductions.
Owners of traditional IRAs must start taking required minimum distributions (RMDs) at age 72. Donations of IRA funds help meet the RMD for the year.
Distributions of IRA funds must be made directly to the charity, not the owner. Donors must work with their IRA custodian in order to be certain the donation is handled properly.
Meet with your financial advisor
Donors should consult with their advisors to review tax considerations before making donations of securities or contributions from IRAs. The above information is not meant as tax or legal advice. Please consult with a professional tax advisor. SST Accountants & Consultants has tax professionals ready to assist. Please contact us to plan a review of your current situation.
Special thanks to Simeon May, CPA CCA CAE, SST Manager of Client Accounting and Advisory Services, for providing the content for this post.