Dec. 16, 2021

🎁 A Season of Giving (+ Year End Financial/Tax Checklist)

We are in the thick of the holiday season. Not only are we in the spendiest time of the year, but also the most charitable. Charities see a huge boost in donations from November to December. In fact, the busiest days for charities tend to be Giving Tuesday (the Tuesday after Black Friday) and the last three days of the year. We all know that giving can help others in need, but most people don’t realize that it can benefit us as well.

One of my favorite books, Happy Money: The Science of Happier Spending, the authors showcase five principles of spending that can drive happiness. One of those principles is “Invest in Others” and I wanted to share a few of my favorite learnings from the chapter that highlights the impact giving to others can have on ourselves.

  • A study of over 200,000 people around the world found that in 120 of 136 countries, people who donated to charity in the past month reported greater satisfaction with life. This relationship emerged in poor and rich countries alike, and held up even after controlling for individuals’ income. In fact, donating to charity had a similar relationship to happiness as doubling household income.

  • This study showed that people who report donating money to charity feel wealthier than those who do not, even controlling for how much they make.

  • Finally, in a study of more than six hundred Americans, the more they invested in others, the happier they were. This relationship between prosocial spending and happiness held up even after taking into account individuals’ income.

πŸ’Έ Tax Benefits

Another great incentive to give is the tax benefit the IRS offers for donating to charities. Charitable donations can be listed as a deduction on your taxes. Yes really! This means your taxable income is lower and therefore, a lower tax bill. How wonderful is that? Not only are you helping an organization continue life-changing work, but you also get the benefit of paying less taxes for doing so. However, there are certain rules and limitations to this. 

  • The charity has to be listed as tax-exempt by the IRS. An easy way to recognize if a charity is tax-exempt is if they label themselves as a 501(c)(3). The IRS has a tool to check their status here

  • To get the full tax benefit of your donations, you’ll need to itemize your tax return, otherwise you can only claim up to $300 (single) or $600 (joint). Check out this article from TurboTax to learn more about when it might be better to itemize.

  • Not all donations are deductible. Check out this article from TurboTax or this article from H&R Block that detail more about what is and isn’t tax deductible. Also, make sure to keep all your receipts in case you need to prove the donation down the road.

  • There are limits on how much you can contribute based on your income, but most people won’t come close to hitting them. If you want to read more on these limitations, may I suggest this super thrilling read from the IRS website. Normally the cap is 60% of your adjusted gross income, but the IRS announced it’ll be 100% for 2021.

πŸŽ— Charitable Donation Hacks

With the internet, it’s never been easier to make charitable donations, so I’m not going to show you how, but I have found a few donation hacks that are worth sharing:

  • Amazon Smile - I can’t believe I didn’t know about this sooner. With Amazon Smile, you can shop exactly like you normally would, except that Amazon will donate 0.5% of your purchases to a charity you pick. All you have to do is use the Amazon Smile shopping link and you’re all set.

  • Donor-Advised Funds - They allow you to contribute cash, stocks, or crypto and take an immediate tax deduction this year. However, instead of needing to make all your donations this year, you can invest your contributions and donate the funds in future years to any charity you want. It’s great if you’re going to be in a high tax bracket this year and you want to front-load your donations for future years. If you’re interested, I’d recommend checking out Daffy.org where I moved my DAF to this year.

  • Donate Miles - Donating points and miles can be a great way to give back without shelling out any cash, and it’s also an easy way to extend your points balance if it’s about to expire. ThePointsGuy has a great post about how you can do this.

  • Buy a Zoo or Museum Membership - Most of your local Zoos and Museums are registered nonprofits and membership fees are tax deductible. Even better, many are members of the ASTC or AZA and memberships include free or discounted admission at Zoos and Museums across the country.

  • Watch out for scams - Before you hit that Send Money button on Paypal, make sure your information and money is going to a legitimate source. Check this article from AARP that details red flags to watch for as well as sites to check the validity of a charity.


β˜‘οΈ Year-End Financial/Tax Checklist

December is the perfect time to check in on your finances and make any last minute money moves before the end of the tax year. Not only will you save time and money but your accountant will be so grateful and a happy accountant makes for even happier tax returns. Here’s a few things you might not have considered in 2021:

  • Make a charitable contribution: I already covered this extensively above, but certainly didn’t want to leave it off the list. 

  • Contribute to a Backdoor Roth IRA. A Roth IRA is a great way to invest after-tax money for retirement – it grows tax-free and all future withdrawals are tax free. However, if you’re not eligible to contribute to a Roth IRA (income limits are $140k for single and $208k for joint filers) there’s an easy workaround (that proposed legislation might change in 2022). You just need to make after-tax (nondeductible) contributions to a traditional IRA, which virtually everyone can do, and then immediately convert the funds to a Roth IRA. If you already have funds in a traditional IRA it might not make sense, but this Schwab article explains the process in more detail.

  • Harvest your losses to save on taxes. If any of your investments are down, you can sell them and use the losses to offset gains or your income (up to $3k) and lower your tax bill. If your investing app doesn’t do this automatically (Wealthfront does it for me) you’ll have to do it manually. And if you still want exposure to the investment you sold, you’ll need to buy something similar, but not exactly the same to avoid the “wash sale rule”. This NerdWallet article explains a lot more about how it works. There’s a tax loophole for Crypto, because it’s not subject to the wash sale rule, so you could sell your bitcoin, capture the loss, and buy it back right away.

  • Spend down your FSA. Normally these are “use it or lose it” funds, and come January 1st, any money left over goes POOF. However, those rules might be more lenient this year, but only if your employer opted in. If not, you’ll want to stock up on any medical items you might need. The FSA Store is a treasure trove and you can get 2% cash back through Rakuten. #Hack. If you still have funds left over these two articles from Wirecutter and CNBC have some good inspiration. Or since we’re in the spirit of giving, consider buying items to donate to local shelters or charities.

  • Open or fund a 529: If you have kids or you’re planning to get another degree, a 529 college savings account can be a great way to save. You can invest your contributions and withdraw them tax-free to pay for college or private school. In most states, the contribution deadline is December 31 although in a few states the deadline is in April. You can even consider superfunding a 529, which lets you fund up to five years’ worth of contributions at once.

  • Exercise stock to stay under AMT. If you work at a company that grants you incentive stock options (ISOs), exercising them can trigger the Alternative Minimum Tax, but for many people it’s possible to exercise just up to the AMT crossover point and avoid owing any taxes. This article has a good overview, but I’d recommend discussing this with an accountant as well.