This is a guest post from Steve, who writes about finance and life at Brip Blap.
As the holiday season approaches, calls for donating to charity begin to multiply. Americans donate over $240 billion per year to various charities, and that’s simply in terms of money; the contributions in goods and services add even more to that number. This is a brief guide to the biggest questions about charitable giving in the US.
Decide what’s right for you. First of all, you need to come up with an idea of the type of charity you want to support. The list is almost endless. There are small local charities that benefit a very specific area, and there are gigantic global charities that help around the world. There are charities that try to offer direct help, and those that try to raise awareness. A few things you should consider before deciding on a charity:
- Is it a “good” charity?
- How will you contribute?
- Will you receive a tax deduction?
Is it a “good” charity? Make sure you agree with the charity’s stated aims. Try to understand what percentage of your contributions will go where you think they need to go. The IRS has a Form 990, “Return of Organization Exempt From Income Tax.” This form is probably your single best piece of information about a charity, because it’s the way the government prevents abuse of tax-exempt status.
There are almost 2 million American charities; specifically you should seek out “qualified organizations.” A qualified organization is called that because it qualifies for a tax deduction. These organizations include religious groups, public schools, not-for-profit hospitals, parks and a variety of other groups. If the organization is not qualified there is no barrier to giving to that group, but your donation will not be deductible.
You can view a charitable organization’s Form 990 to find out more about that organization’s mission and programs. The IRS Form 990, “Return of Organization Exempt From Income Tax,” can be thought of as the financial statements of a nonprofit organization. The form gives information about the organization’s finances and how money collected is spent. Keep in mind that although some groups may spend more on overhead than others, that does not necessarily disqualify a group from your consideration. Larger nonprofits may have more expenses for outreach or large, multi-year projects. If you have any concerns about how the money is being spent, you should contact the organization and ask them for more information; if they won’t provide it, that’s a good indicator!
How will you contribute? There are three basic ways to contribute to charity: money, goods and time. All three have value, and you should never let yourself feel badly because you can give one way and not another. A busy traveling salesman may not have the time to work hands-on with a charity group, but he can donate money or goods. A college student may not have extra cash or goods but can certainly contribute time. Everyone can give something:
- Give money. Obviously this is the simplest way to contribute, and usually it can be done quickly by going to a web site or mailing a letter. Many charities struggle to raise money, and every little bit counts.
- Give goods. You may think that old, gently worn coat will never been worn again, but there are plenty of organizations who would be thrilled to give that coat to someone who needs it. Clothes, books, almost anything that is in decent condition can be given to worthwhile organizations like the Salvation Army.
- Give time. A lot of people give money and goods to charitable organizations, but many of them need the gift of your time more than anything. From answering phones to building houses, many organizations deeply appreciate the time you can give them to help them spread their message or even complete their core missions. You can even under certain circumstances donate your professional services to an organization.
Will you receive a tax deduction? Some people may think that it’s improper to discuss tax writeoffs when talking about giving. The US government has chosen to create an incentive to giving, though, and there’s no reason not to take advantage of it. Of course, if you can only really receive the benefit of these deductions if you itemize. If you give money or other gifts (stocks, goods, etc.) and the charity has the proper Internal Revenue Service (IRS) status, you may be eligible to deduct some or all of your contributions. The rules have been significantly tightened in 2007, however. A few basic pointers:
- Starting in 2007, you need a receipt for ANY donation. The old limit of $250 has been eliminated, so even a $10 bill in the collection plate requires a receipt if you want to deduct it.
- You may deduct up to 50% of your adjusted gross income in one year for charitable donations (certain contributions, though, may have lower limits).
- If you give more than 50%, you can carry the excess forward for up to five years.
- If you donate goods to an organization, it must be in good condition or better in order to be deductible – and if it’s worth more than $500 you have to get a professional appraisal to prove its value.
- If you receive something in return for your donation, you can only deduct the excess of your donation over what you received; so if you paid $100 for a charity dinner with a value of $30, you can only deduct $70.
Your best resource for figuring out the rules? Go to the source: Publication 526 from the IRS website. (If you have any concerns, make sure you talk to a tax professional about your specific situation.
While there are a lot of rules surrounding the deductibility of donations and a lot of suspicion over some recent charity scandals, it is important to remember that the great majority of charitable organizations exist for one reason: to help. As the holidays come, it’s important to remember those less fortunate, and extend what help you can. You can even be a little selfish, because one of the biggest benefits of giving is that you’ll feel great about doing it!
Read more from Steve at his blog, Brip Blap.
Updated June 23, 2016 and originally published November 20, 2007.