As nonprofits prepare for year-end, it’s important to guide donors in making the most of their contributions by advising them on tax-efficient charitable giving before December 31. By highlighting potential tax savings, nonprofits can boost year-end giving while ensuring donors make the most of their financial support. It’s important to understand the principles and guidelines surrounding tax benefits and charitable giving. Tax incentives for donations are designed to encourage generosity and support for nonprofit organizations.
When donors see the financial benefits of their generosity, they are often inspired to give more. Offering personalized guidance builds trust and strengthens your relationship with donors, positioning your organization as a valued partner in their philanthropic and financial planning, ultimately building long-term support.
TDG shares 7 essential tips to help you engage supporters and drive results effectively.
1. Donate Appreciated Assets
Encourage donors to consider gifting appreciated securities, which offer significant tax advantages. In Canada, donations of stocks, bonds, or mutual funds are exempt from capital gains tax, and donors receive a charitable receipt for the full market value.
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- Avoid capital gains tax: Direct transfers of appreciated securities eliminate the tax on gains.
- Claim full tax credits: Donors can receive tax credits based on the asset’s full market value.
2. Cash Gifts
While appreciated assets often provide the most tax benefits, cash gifts remain a simple and effective way for donors to support your organization.
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- Year-end reminder: Ensure donors know they must make their gifts before December 31 to qualify for tax benefits on this year’s return.
- Simplified tax reporting: Encourage donors to save their donation receipts for ease when filing their taxes.
Charitable donations in Canada provide tax relief to both individual and corporate donors and are eligible for federal and provincial tax credits. The federal charitable donation tax credit is 15% on the first $200 and 29% on amounts over $200 (33% if the donor’s taxable income exceeds the top income bracket). Provincial tax credits vary.
Only gifts to registered charities and other qualified donees are eligible for tax credits. An organization’s registration status can be checked on the CRA website.
3. Consider Donor-Advised Funds (DAFs)
When donors contribute to a DAF, they receive immediate tax benefits for the full amount of their donation in the year it is made. The funds are then invested and grow tax-free, while donors retain the ability to recommend grants to charitable organizations over time, at their discretion. This structure enables donors to take advantage of the tax deduction upfront while allowing them to plan the disbursement of grants according to their preferred timeline, possibly even years later.
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- Immediate tax credits: Donors receive credits upon contributing to the DAF, even if grants are distributed later.
- Long-term giving control: Donors can commit large gifts during high-income years while managing their giving over time.
4. Plan a Giving Strategy
For donors aiming to maximize tax savings, strategic giving is key, especially if they have higher-than-usual income. For example, donors can “bunch” several years of charitable contributions into one tax year to enhance their tax benefits. This strategy helps donors optimize their contributions and align their giving with their financial goals.
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- Bunching Donations: Recommend donors combine multiple years of contributions into one year to increase their tax savings.
- Tailored Plans: Collaborate with donors to create a customized giving strategy that matches their financial objectives and philanthropic vision.
5. Charitable Bequests and Legacy Gifts
Legacy gifts provide donors with an opportunity to make a profound and lasting impact on the causes they care about while also offering significant tax relief for their estate. By including charitable bequests or other planned gifts in their estate planning, donors can reduce the taxable value of their estate, which may result in tax savings for their heirs.
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- Estate tax savings: Charitable bequests can lower the taxable value of a donor’s estate, benefiting both their heirs and your nonprofit.
- Long-term impact: Emphasize the powerful legacy donors can create for future generations.
6. Ensure Donors Get Their Receipts
Help donors claim their tax credits by providing the necessary documentation promptly. Ensure that official donation receipts are issued and delivered, ideally, by the end of February for donations made by December 31. Clear and accurate documentation not only helps donors maximize their tax benefits but also builds trust and strengthens your relationship with them.
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- Accurate receipting: Issue official donation receipts promptly.
- Follow up: Ensure major donors receive their receipts and understand how to claim the tax benefits.
7. Start Early for Maximum Benefit
Encourage donors to begin planning early to fully utilize tax-saving opportunities and avoid last-minute stress. Consider drawing inspiration from these 50 ready-to-use prompts by Namastedata.org to line up your donor communications. By starting well before the December 31 deadline, donors can thoughtfully plan their contributions, consult with advisors and ensure smooth processing. Early preparation helps maximize tax benefits and provides ample time to resolve any issues that may arise.
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- Avoid delays: Transferring assets like securities can take time—starting early prevents complications.
- Offer assistance: Be proactive in offering guidance or connecting donors with financial advisors if needed.
As nonprofits prepare for the next fiscal year, it’s equally important to focus on efficiently closing out last year’s donations. In fact, a meticulous year-end close ensures accurate reporting and sets the stage for a successful year ahead. Stay tuned for our first blog of the new year, where we’ll provide detailed guidance on reconciling fundraising efforts with accounting practices, helping you achieve a seamless and effective year-end close.
At The Dennis Group Inc., we specialize in helping non-profits enhance donor engagement and boost fundraising success. Contact us to discover how we can support you in making the most of this giving season.
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