Make It Count
Mailboxes jammed with appeals from charities you’ve donated to in the past — and others that hope to add you to their list of benefactors — is a sure sign the holidays are approaching.
The holiday season is prime fundraising time for charities, says Sandra Miniutti, vice president of Charity Navigator. In fact, nonprofits receive 40 percent of their contributions between Thanksgiving and New Year’s, according to Charity Navigator research.
“Part of it has to do with the altruistic feelings that come with the religious holidays,” says Miniutti. “But also, people are coming to the end of the calendar year. They know how their personal finances performed and if they’ll have any money leftover to make a contribution. Also, they have to make the contribution by the end of the year if they want to get the tax deduction.”
Tax incentives are a huge driver of gift giving. In fact, Miniutti says, charities see the biggest donor traffic on Dec. 31. “There are a whole lot of people making contributions at the last minute,” she says.
After all, if you can save money on your taxes while supporting a cause that’s dear to your heart, that’s a win-win. Here’s how to maximize your giving — both for you personally and for the charity you support.
Know Your Charity
First, make sure that the charity you are donating to actually does the work you think it does. For example, some charities exist solely to fund research into a problem or disease. Others raise money to help those directly impacted by it. Before clicking the “donate” button on a charity’s website, read their “About” and “Mission” pages to make sure your donation is going where you want it to go. Also Google the charity’s name to read news reports and check its rating on a site such as Charity Navigator or GuideStar, both of which evaluate charities based on their financial reports and tax filings.
For large charities that have many missions, you can designate how you want your donation used — for a specific program or research, for example. However, while this is an option, charities aren’t big fans of being told exactly how to spend their donor dollars. It takes away the flexibility they need to fund the areas of greatest need.
“If you love a charity and you love what they do, give them unrestricted money,” says Eileen Heisman, president and CEO of The National Philanthropic Trust. “A lot of Baby Boomers and Millennials always talk about wanting to give to projects, but the hardest money to raise is the money for staff training, the money to make sure the computers are current, the money to make sure that people have chairs that aren’t broken and the money to keep the lights on. It’s some of the most important money and very hard money for charities to raise.”
Be a Loyal Giver
Instead of picking a new batch of charities to donate to each year, pick a couple of charities you care deeply about and support them for the long term, says Heisman. From the charity’s perspective, it’s more cost effective for them to receive one $250 gift from one donor than five $50 gifts from five donors because one donor requires less administrative cost than five. And by staying around year after year, you’re also saving them money on outreach. “If you like what they’re doing and you stick around, you’re saving them on fundraising and overhead costs because finding new donors is actually really expensive,” says Heisman.
So research your charities, pick a few that fit your values and then give generously and regularly.
Know Your Income Tax Bracket
Take a look at your earnings for the year. Are you close to (or have you) jumped up into a higher tax bracket? (To find out, ask your accountant or click here.) If so, it’s possible that by increasing your charitable giving, a deductible expense, you could bump yourself down into a lower tax bracket. This would equate to paying less taxes overall.
“We want to know the tax bracket first because if they are close to jumping up into a higher tax bracket, they can choose to do a charitable gift, reduce their income by that and then stay in the lower tax bracket,” says Susan Conrad, lead retirement plan advisor for Plancorp in St. Louis, Mo.
For example, if you’re currently in the 28 percent tax bracket (a range of $85,650 to $178,650 for a single person), a charitable contribution that brings your taxable income below the $85,650 figure drops you down to the 25 percent tax bracket, which reduces your overall tax liability.
Think Beyond Cash
If you have a stock that has done well, instead of selling it and paying capital gains tax, use it to lower your tax bracket, thus reducing your tax liability. For example, if you bought a stock for $5,000 and now it’s worth $10,000, if you sold it you’d have to pay capital gains on your profit. However, if instead you gift that stock to a charity, you can take the full value of the stock as a deduction.
“Then no one pays the capital gains tax,” says Larry LeGrand, CPA with PlanCorp. “You as the individual have made a gift and done it in the most tax-efficient manner by avoiding capital gains and getting the full benefit of the deduction.”
To do this, you must have owned the security for at least a year, LeGrand says. And be mindful of the markets — you can only deduct the value of the stock on the day it was donated.
Consider a Donor-Advised Fund
If you received a windfall this year — maybe an inheritance, hefty bonus or your business sealed a huge deal right before the holidays — consider taking a portion of your income and putting it in a donor-advised fund. By doing so, you don’t have to decide right away which charity to donate to, but you get the immediate tax benefits as if you had made a charitable donation.
“What that fund does is that it allows you to say, ‘I’m going to put $50,000 in the fund,’” says Conrad. “I get the tax deduction for the entire $50,000 in 2013 because it’s the year that I established the fund. But then, over a period of time I get to dictate in whatever increment, how much I pay per year and who it goes to. So, in 2014 I could say, “I want to send $10,000 to the American Red Cross or $10,000 to the United Way.’ You decide where it goes.”
However, donations must go to certified 501(c)3 charities (your child’s college fund, while an altruistic goal, does not qualify). And once the money is in the fund, you cannot withdraw it as cash for your own purposes.
Say No to Cash
From an IRS perspective, check or credit card is the best way to make a charitable donation. This way you have a record of what you’ve donated in case you are ever audited. In fact, if you give more than $250 to any charity you need a letter from that group certifying the donation as proof.
“If you were called by the IRS to justify your charitable deductions, you’ve got to show the canceled checks and the letter or you’ve got to show the receipt, the stock coming out of your brokerage account and the letter from the charity,” says LeGrand. “You need both pieces of documentation.”
So whether it’s your church or a community fundraiser, never throw cash in the collection box unless you can be assured of a receipt.