What Everyone Ought to Know about Donating to Charity

Thinking of spreading some holiday joy this season by donating to a cause that’s near and dear to you?

The holiday season is a time when many people feel inspired to give to causes they want to support. But if you don’t donate to charity regularly, or if you’re having trouble figuring out which charity to give to, the process can be a little overwhelming.

Here are some big to keep in mind to make the most of your charitable giving this year.

1. The Right Charity for You

You may have a rough idea what type of cause you’d like to support. If you’re particularly drawn towards animal welfare, for instance, you may want to give to a charity that helps with animal rescue, animal rehabilitation or animal adoption.

But how do you know which charity is the right one to help out?

Thanks to the Internet, it’s now easier than ever to look into your options and select a charity that both speaks to you and demonstrates the ability to use your money wisely. Check out sites like Charity Navigator, GiveWell, the American Institute of Philanthropy CharityWatch, and the Better Business Bureau’s Wise Giving Alliance. They’ll give you an overview of each charity’s mission and show you how well donations and operations are managed.

2. Checking if the Charity is Reputable

We’ve all heard unfortunate stories about misused funds, tax evasion and other scandals that can leave a bad taste in potential donors’ mouths. Once you’ve found a charity you’re interested in donating to, dig a little further to see what their reputation is like.

The sites listed above offer behind-the-scenes information like how the charity fundraises, how long they’ve been in operation, how much of your money will be spent on the mission (vs. spent on administrative fees and fundraising), and whether the charity has come under any scrutiny for suspicious behavior.

As a potential donor, you also have the right to review each charity’s Form 900, which reports various financial activities and figures to the IRS each year. These forms will either be available on the charity’s website or you can obtain them by one of these methods.

Look especially at the charity’s overall budget, how much of each donated dollar is spent on fundraising (Charity Watch says a “highly efficient” charity should spend 25% or less on fundraising), and whether fundraising costs have gone down over time (ideally it should).

If you have any additional questions, or if you need help understanding the numbers, remember that you can always ask the charity directly. Call their main line, tell them you’re thinking of donating and ask to speak to a representative who can clear a few things up for you.

3. Saving Money on Your Taxes

In addition to the joy of knowing you’re helping make the world a better place, donating to charity has the added benefit of netting you some pretty nice tax breaks.

In order to claim the largest possible deduction for your charitable donations, follow these tips:

• Keep careful written records of any donations you make throughout the year. This includes holding onto copies of bank statements, cancelled checks and any letters you receive from a charity thanking you for your donation.

• As a rule, you may deduct cash contributions up to 50% of your adjusted gross income (or AGI). You may deduct property contributions up to 30% of your AGI, and you may deduct appreciated capital gains up to 20% of your AGI.

• If you’re donating property, such as a vehicle, research its current fair market value; this is the amount you are allowed to claim for the donation.

• If you receive any “perks” for your donation, like merchandise or services provided as a thank-you, you will need to subtract the retail amount of that perk from the amount you’re claiming.

• To earn a deduction, you need to donate to a qualified, tax-exempt organization. See IRS Publication 526 for more on this.

• During tax season, fill out IRS Form 1040 and be sure to itemize all of your requested deductions on Schedule A.

• If you make any non-cash contributions over $500, you must report them on IRS Form 8283, along with providing a written acknowledgment of your donation from the charity.

• If you make any non-cash contributions over $5,000, you must also provide a written appraisal confirming their value.

4. Consider Giving Stock

Think outside the box: instead of giving cash or in-kind contributions, you can potentially aid the charitable organization more by giving the gift of appreciated stock.

Donating stock rather than cash holds three advantages: 1) you avoid paying capital gains taxes on the appreciation; 2) you write-off the entire (appreciated) value of the donation on your taxes, and 3) the charitable organization receives a potentially larger donation as the result of your tax savings.

For example, let’s imagine that you want to give a charitable group a donation of $2,000. You hold stock that you’ve purchased at $1,500 and that has since risen to $2,500. You plan on using these earnings as the income source for your donation.

Theoretically, you could sell this stock, pay capital gains on the $1,000 gain, and then give the remainder of the money to charity. But alternatively, you could give the entire $2,500 to charity, thus avoiding paying capital gains and giving yourself the ability to write-off a donation of the entire $2,500 amount.

The charity gets a larger donation; you get a larger tax write-off. That sounds like a win-win.

Conclusion

Don’t forget: document, document, document. If the IRS audits you and asks for more information about your charitable write-offs, you’ll be in the best possible position if you have ample documentation. If possible, be prepared to show receipts, photos, cancelled checks, and any other documents that can reflect the value of your gift.