May 2016
Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
You’ve worked hard for your money and invested it wisely by following time-tested practices such as diversification and dollar-cost averaging. At some point, you may decide that you want to “share the wealth” with others by making charitable gifts to non-profit organizations and receiving an income tax deduction if you are able to itemize. For example, a taxpayer in the 25% federal marginal tax bracket who donates $1,000 to a charity and itemizes deductions would have tax savings of $250 ($1,000 x .25) for a final out-of-pocket cost of $750.
Not all charities are created equal, however. Instead, they vary in how they raise funds, operate, and fulfill their charitable missions. Some operate very effectively with low administrative costs while others have been accused of having “administrative bloat.” Below are some tips for smart charitable gifting from University of Missouri Cooperative Extension and the Internal Revenue Service (IRS):
- Be Deliberate, Not Impulsive - Many people make impulsive giving decisions, basing gifts on who knocks at the door, phones, or mails an appeal. Instead, select charities whose work you admire. This might include an organization that has had its outstanding humanitarian work publicized in local or national media (e.g., a food drive and hospice care), an organization that supports a cause that you are passionate about (e.g., domestic abuse and financial empowerment), or organizations you are involved with as a volunteer or those that have helped you or your family/friends personally (e.g., a local hospital or youth organization such as 4-H).
- Plan Your Donations - Decide in advance to whom and how much to give and include charitable gifting in your financial plans. In other words, create a charitable gifting budget. For example, you might allocate part of a year-end bonus at work for cash donations or make $X of donations per month. How much you give to charities is a personal decision. Make the amount meaningful to you. You can also decide to say no. Simply kindly turn down requests for charities that are not in your budget and on your high-priority list.
- Specify a Purpose - Not knowing how donated money will be spent often holds many people back from supporting a charity. It is okay for donors to indicate up front an intended purpose that aligns with the mission and work of a charitable organization. It is also okay to follow up with charities later and ask what a past gift specifically accomplished. Many charities also produce an annual report that provides information on program results and the use of donations to meet their goals.
- Know the Tax Rules - Check that organizations that you plan to send donations to are qualified by the IRS to receive tax-deductible contributions. Information about specific non-profit organizations is available at (Exempt Organization Select Check, a searchable online database of qualified organizations).
- Check Your Charity - In recent years, there have been reports of charitable organizations employing telemarketing firms that are paid more than half of the funds raised. Donors, of course, expect their money to go to a deserving cause (i.e., helping people). Investigate a charity’s “administrative expense ratio,” which describes how it allocates its budget between funding its mission and funding administrative costs and overhead. Three good online resources are www.charitynavigator.org, www.guidestar.org, and www.give.org.
- Get Donations in Writing - Make sure that all charitable gifts of $250 or more are properly acknowledged by the charity as per IRS income tax regulations. This includes a letter from the recipient that describes the cash or property that was donated (e.g., $100 cash donation or the make, model, and year of a donated car) and whether any goods or services were received in return from the charity such as a meal or free concert tickets.
Before you write a check, type in a credit card number, or text message a donation, learn as much as you can about the charities that have asked you for money. Doing some advance research before you make a charitable donation will help assure that your money is well spent. Smart spending decisions, including charitable donations, are small steps to wealth.