Educate Donors About Year-End Tax Benefits

an image showing a jar of coins and a laptop with the words, "Tax savings 101 for Donors"

For the performing arts, the holidays represent both an opportunity to call on potential donors but also to educate donors about the year-end tax benefits of those contributions. This time of celebration and gratitude gives patrons the chance to support their favorite causes while helping your organization thrive.

In this post, we provide some ideas to share with your donors about special tax advantages in easy-to-understand terms. The greater the understanding of the tax benefits, the greater the rewards your organization may reap during the holiday season. Before we begin, let’s brush up on a couple of couple of essentials regarding the request for year-end gifts.

Start by Clarifying Donation Requests from Potential Donors

Your donor requests must first focus on what past contributions made to your organization and community. Clearly convey the impact those donations made such as, “With your help, we enriched the lives of 120 youth from underserved areas with a love of the arts.” If you renovated the lobby, be sure to show “before and after” pictures that fully communicate the effect of those contributions.

If you have matching gifts, shout this from the rooftops! Many donors love to contribute at a time when they are matched dollar for dollar and may be inspired to give more. As you receive donations, take time to thank donors in one of 15 public ways that motivate greater giving among constituents.

Help Donors Undertand the Value of Year-end Tax Saving Gift Strategies

As a retiree, it’s important to understand how donations to non-profits affect tax-deferred accounts, long term savings, and this year’s IRS tax returns. Thus, a little education may be in order to help donors recognize potential tax-saving benefits.

1. Educate donors on the impact of qualified tax-deductible donations?

Itemizing deductions on tax returns has the net effect of reducing tax liability, and this is especially true when a donor makes significant charitable contributions throughout the year. However, contributions are tax-deductible only when made to qualified charities or non-profits. Given the rise in crowdfunding sites (Gofundme, Kickstarter, Indiegogo), this is an important point to share with constituents, as some donors believe that all contributions are deductible.

Provide a link to documentation showing your 501(c)(3) status, and explain that all gifts are tax-deductible and receive a written receipt for contributions to support deductions. (Hopefully, your fundraising software includes time-saving, automated receipts.)

2. Do donors understand the effect of qualified charitable distributions (QCDs) on RMDs?

For many retirees, the term, “Required Minimum Distributions” or (RMDs), is a dreaded phrase. This rule forces retirees 72 years and older to withdraw a minimum amount of their tax-deferred savings (IRA, 401k, etc) annually and generally pay taxes on those distributions. For some, the amount required is more than they spend, yet taxes on this unneeded portion must be paid. (Generally, retirees worry they’ll outlive their savings!)

In good news, the Secure 2.0 Act introduced changes to retirement savings rules, allowing individuals to make tax-free Qualified Charitable Distributions (QCDs) directly from tax-deferred accounts to eligible non-profits. In addition to feeling good about supporting your organization, the RMD donation provides three significant benefits:

  1. The contribution is fully tax deductible lowering adjusted gross income and reducing taxes.
  2. The RMD satisfies the IRS rules on annual withdrawals.
  3. In the best news, no taxes are due on RMDs! Under the Secure Act, the IRS allows RMDs to be funneled to non-profits without requiring any taxes to be paid.

3. Help patrons recognize the value of tax loss harvesting

Barring the calamitous drop in the markets in 2021, most retirees will receive capital gains on their investments with accompanying taxes due. Tax loss harvesting involves selling investments that have incurred losses to offset gains and reduce your taxable income. By strategically pairing this technique with itemized deductions, donors can optimize their tax situation with a double benefit of reducted capital gains taxes and an itemized, tax-deductible contribution.

4. Non-Cash contributions provide significant, tax-deductible value!

Don't limit requests to just cash donations; non-cash contributions can also provide benefits to your organization and tax benefits to constituents. This includes items like clothing, electronics, or even vehicles.

As in other donations, be sure to provide receipts to your donors. If your donor/patron software supports the acknowledgement of non-cash donations, take time to record these gifts. Remember, the donor who brought hard-to-find toilet paper during the pandemic is the one who opened their wallet when you reopened!

If the value of the non-cash donations exceeds $500, notify donors that they may need to complete IRS Form 8283.

5. Gifting stock to non-profits provides tax-savings!

Donating appreciated stocks can be a tax-efficient way to support the arts. Explain to constituents that when they donate stocks that have increased in value, they avoid paying capital gains taxes. Further, despite the increased gain, donors still receive a deduction for the full fair market value of the stock on the day of the donation.

Suggest that donors speak with their brokerage or financial institution to transfer the stock directly to your own brokerage account. This provides proof of the gift, and of course, you’ll recognize these in your patron databases and with a tax-receipt for their records.

6. Remind Patrons About Other Simple Ideas for Contributions

Beyond traditional financial contributions, there are other ways your patrons can support you. First and foremost, they can attend performances and buy tickets for friends and family. If your ticketing platform includes gifts cards with automated balance tracking, encourage patrons to purchase them directly from you with links to your site.

The performing arts cannot operate without an army of dedicated volunteers. Ask patrons how they can add their time and skills to your organization. Finally, give hashtags, photos, and snippets to share through their own social media accounts to share their joy of the arts.

Educate Donors About Year-End Tax Benefits and Reap Greater Rewards

Year-end giving to the performing arts not only enriches the community but can also bring tax benefits to your contributors. By understanding itemized deductions, leveraging Qualified Charitable Distributions, exploring tax loss harvesting, and considering non-cash and stock contributions, donors can maximize the impact of their support while reducing their tax liability. Take time to educate donors about year-end tax benefits, and your organization will reap greater rewards as the year comes to a close.

As a final note, remember that it's not just about the financial benefits; when donors understand how their past contributions helped sustain the arts and the culture that makes up their communities, they recognize the true value of their generosity.