It’s that time of year again. November 28th is #GivingTuesday - a global day of giving intended to motivate people to collaborate and give back during the most charitable season of the year. During the holidays, people are more inspired to give. In fact, one third of all charitable giving done in America happens in the month of December.
We all have our reasons for giving to charity. Some of us root our charitable donations in our faith, while others give to a cause that’s near and dear to their heart. Either way, research has proven that charitable giving can lead to a more satisfying and fulfilling life. It’s also a good way to reap tax benefits with the impending end-of-year tax deadline creeping up on us.
Regardless of whether you’re just feeling charitable, or you want to see the positive benefits of charitable giving on your taxes, you should do a little bit of digging before you sign that donation check.
Don’t Just Give to Give. Find a Cause You’re Passionate About.
You have so many options when it comes to charities you can donate to. According to the National Center for Charitable Statistics, there are over 1.57 million tax-exempt charities that exist. So don’t just pick one at random!
Instead, decide what’s important to you before deciding where to donate. What are you passionate about? Find charities that address those interests, and determine whether their mission aligns with your values.
Next, you get to decide how you want your charitable donation to have an impact. You should consider…
- Do you want to help a local cause, or a global initiative?
- Do you want your donation to provide direct help, or would you rather raise awareness about an issue you care about?
- Do you want your money to fight poverty? Go towards resources? Promote research?
Deciding how you want your donation to be used can help you determine where to donate.
Verify the Charity’s Non-Profit Status.
If you’re going to donate to charity, you might as well get the tax benefits for your donation. It only makes sense to utilize the option since it’s available to you. In order to do this, you’ll need to verify the charity’s non-profit status.
To verify a non-profit status, you’ll want to look for a 501(c)3 organization. The IRS has an excellent tool to help you do this. A 501(c)3 organization has to comply with IRS regulations, including filing an annual financial report to the IRS called the Form 990. By donating to a 501(c)3 charity, you’re helping to ensure your donations are deemed tax deductible by the government.
Research the Charities Through an Independent Charity Evaluator.
The last thing you want to do is fall into a scam, or donate to a charity who misuses funds. I suggest that you use one of the following three charity evaluators before you donate:
These three organizations each offer their own unique system for rating charities on a wide range of factors including their finances, the transparency of the organization, and more. Keep in mind that if you’re researching a smaller charity, they may not appear on one of these search engines. That doesn’t mean they aren’t a legitimate charity, it just means they’re not big enough to be vetted by a charity evaluator.
I recommend checking all three of these evaluators to get a good baseline before you commit to any one charity to donate to.
Make Sure Your Money is Going to the Cause.
If your charity isn’t listed on one of those three charity evaluators, that’s okay. It just means you’ll need to do a little bit of extra research. Pull the charity’s Form 990 here. This will help you get a better idea of whether the charity is going to be a good financial steward of your dollars.
You’ll want to look for how much of the charity’s money (received from donors like you) goes towards the programs or services they offer (versus paying administrative and fundraising costs). In general, I advise that donors make sure that at least 65-75% of the charity’s budget is going toward programs or services they offer.
Will You Receive a Tax Deduction?
In a word: maybe. Most people aren’t aware that you need to itemize in order to get the deduction for charitable giving. A good rule of thumb is to speak with a tax professional to make sure things are setup correctly to receive the deduction. Always hold onto receipts for your donations - especially if they’re over $250.
There are several common misconceptions that are worth addressing here. First, raffle tickets are not deductible. Second, volunteering your time (or the value of the time spent volunteering) is also not deductible. Finally, if you attend a charity dinner or win a prize for your donation - you can only deduct the fair market value of the food/service/product you received (not the amount you donated). For example, if you spend $250/person on a charity gala and receive a steak dinner - you only get to deduct how much a typical steak dinner would cost, not the full $250.
Does Your Employer Match?
In some cases, companies offer a donation match program for qualifying charities. If you want to double the impact of your donation, it’s definitely worth looking into. Of course, you’ll need to keep in mind that you can only deduct the amount that you donated to the charity of your choice. Any amount that your employer matches isn’t part of your donation.
It’s especially unfortunate that there are people in this world who are willing to capitalize on the goodwill of donors in order to turn a profit. But they do exist. When you’re looking to donate, it’s important that you do your fact-checking ahead of time to avoid getting scammed.
These “charities” tend to pop up with natural disasters, and it’s been noticeable lately with the numerous hurricane and wildfire relief funds that have been taking action to help those in need. The best way to avoid these scams is to go through the charity evaluators listed above before you donate.
The second best way to avoid scam charities is to skip any over-the-phone donations. There’s no way to verify the legitimacy of a charity who calls you at random asking for donations - which puts you at risk for donating your hard-earned cash to a charity that doesn’t actually exist.
Gifting Appreciated Stock - My Favorite Way to Give.
Many people don’t realize this option is available to them - and it’s a phenomenal way to donate to the charity of your choice. Rather than selling your stock to make a cash donation, you can give an appreciated asset to a charity. If you’ve held the stock for more than a year, you can deduct the value of the donation at the time you donate it. You also avoid paying any capital gains tax that would apply if you sold the stock to donate cash.
For example, if you bought a $10,000 stock investment 10 years ago and today it’s worth $25,000 - you can donate that stock. You get to claim the full $25,000 donation as a charitable deduction (if you itemize your deductions and subject to applicable limits and restrictions).
Under this scenario, you avoid paying capital gains tax on the $15,000 your stock gained over the past 10 years and the charity you’re donating to doesn’t have to pay the capital gains tax, either. As always, before making stock donations to a charity, be sure to discuss the best way to go about it with a tax professional.
If you’ve gone through the charity vetting process and still have questions you want answered before donating, I recommend volunteering your time before you open your checkbook. If that’s not feasible, pick up the phone to make an inquiry or pay their facility a visit. A good charity will be willing to answer all of your questions and then some - leaving you with peace of mind to make your charitable donation!
No matter how you plan on donating this holiday season, a CFP® professional can help you vet charities, plan the most tax efficient ways to give, and maximize the tax benefits of your donation while helping you support the causes you’re passionate about. Want to discuss charitable giving in more detail? Contact me today to start the conversation.
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Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.