The year is quickly coming to a close, and the first priority for many people right now is getting through the holidays with as little stress as possible. Focusing solely on the holidays at the expense of your household’s financial needs can only add to stress later, so it might help to get a few items in order now rather than attempting to manage your year-end tasks in the one week between Christmas and the new year. A few days ago, I suggested changing your 401(k) contribution level now because of the time it takes for changes to take effect, and today, I’m looking at charity.

A tax benefit shouldn’t be the sole reason you contribute to charitable organizations, but there is a federal tax deduction for charitable contributions, and it’s better for a family’s own financial situation to take advantage of this benefit if plans call for charity regardless. Unlike other benefits that allow qualification extensions into the new year, to receive a deduction on this year’s tax return, the organization to which you donate must receive the contribution this calendar year.

Unfortunately, the time you spend volunteering for a non-profit organization is not tax-deductible. While volunteering could benefit an organization more than a moderate financial contribution, the tax code favors gifts of value, not time.

Choose your recipient

Charity isn’t an end-of-year activity. If you value a certain cause, doing what you can throughout the year can be a more effective way of maximizing the benefit you can provide to a non-profit or religious organization. Nevertheless, in busy lives, people often don’t think about finalizing their charitable gifts until the spirit of the holiday giving season is in full-force. If you think about giving throughout the year, you may already have one or more intended benefactors.

If you have a charity in mind or if you need to find one, take the time to ensure the organization is not only legitimate but each dollar you provide will do the most good.

Charity Navigator is an indispensable tool. Using Charity Navigator, you can research any non-profit organization. You can see an evaluation of how efficiently the organization uses donors’ contributions and read the latest financial reports to determine how highly the executives are compensated. Charity Navigator will also help you ensure the organization you choose is a qualified 401(c)3, a non-profit organization recognized by the government.

I like to evaluate what percentage of contributed money is used for marketing, particularly. Marketing is of course very important to an organization, and effective marketing can pay for itself in increased donations, but if too much money is spent on marketing and not projects that directly apply to the organization’s mission, you have to consider that your donation may be more effective elsewhere.

In choosing an organization, consider your own values. You may be aware of an organization whose goals you admire and respect, and can start there. But if not, consider what issues are central to your core beliefs. Would you like to see poverty eradicated around the world? Do you believe people can improve their lives by living in a new home? Are you concerned that budget cuts in education are affecting children’s ability to receive a well-rounded education? Should more resources be committed to helping military veterans? You should be able to find an organization catering to the same issue that you consider most important.

When you complete the donation, be sure to keep a copy of the receipt for tax purposes. The receipt should show how much of your contribution is tax-deductible. If you receive a thank-you gift in return for your contribution, the amount you provide will most likely not be 100% deductible.

Open a donor-advised charitable fund

If you can’t or won’t decide which organization is most relevant to your values and charitable desires, open a donor-advised charitable gift fund. I opened this type of account a few years ago at Fidelity. The charitable gift fund allows an individual to contribute today and receive the tax benefit, while granting donations from the fund to worthy organizations over time. By using the gift fund, I could contribute funds throughout the year, invest in index funds, and assuming the funds appreciate in value, donate even more to the non-profit organization.

Even if the value goes down, most organizations can receive gifts in stocks or funds, so they can choose to sell and use the cash when it’s best for the organization.

You cannot withdraw the money you’ve contributed to your charitable gift fund, however. You can’t use a charitable gift fund as a saving or investment vehicle for yourself. Once you transfer money to your charitable gift fund, it becomes the property of the fund itself or its parent company. That’s the reason you can take the tax deduction immediately rather than waiting until you grant your donation to a non-profit organization.

Each year, I donate to DonorsChoose, an organization that helps teachers receive the resources they need for effective classroom instruction, an organization within my undergraduate university, and a few other organizations that match my values or are in response to important issues.

If you donate to charity, do you do so during the year or only at the end of the year? How important is the tax deduction?

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I recently received reader feedback from a conscious saver who is planning to move his money from Wells Fargo to a credit union. She won’t make the Bank Transfer Day November 5 goal, because the credit union’s branch is planned to open November 7. This reader plans to be one of the new branch’s first customers.

This reader wrote into Consumerism Commentary not to write about the effort to move away from big banks. She volunteers for charitable organizations and is wondering why there is no tax benefit available for volunteer time. Charitable financial contributions, such as cash, stocks, or property, are often tax-deductible if the organization receiving the donation is a registered non-profit. I’ve taken advantage of these tax deductions for several years, but for me, the purpose of contributing to non-profit organizations is not the tax deduction. The purpose is to legitimately help an organization whose mission is meaningful to me and my worldview.

I’ve been lucky to be in a financial situation where contributing to organizations would not endanger my own bank account. Another method of donation that can have a great effect on an organization is spending time as a volunteer. In my experience, most non-profit organizations do not generate enough revenue from operations or fundraising to maintain a healthy payroll. They often rely on passionate volunteers to handle a large amount of work. If you don’t have a large amount of money to provide an organization, you could be more beneficial to the group by offering your services as an unpaid volunteer.

If the more financially-comfortable money donors receive a benefit from the government for their assistance in the form of a tax deduction, shouldn’t volunteers receive a benefit related to the financial value of their time and work? Furthermore, the requirement that taxpayers need to itemize deductions in order to receive the charitable contribution deduction results in lower-income taxpayers, who are less likely to itemize, don’t take a deduction they might deserve. This tax deduction favors upper middle class and above because they are more likely to have money to share and are more likely to itemize deductions.

The Congressional Budget Office agrees with me: “Such tax incentives are limited, however, to the subset of taxpayers who itemize, and they favor high-income people, who face relatively higher marginal tax rates.”

While the feeling of being a positive force in the world should be a good enough motivator for working with organizations whose missions you’re passionate about, why should one form of contribution be encouraged through tax policy while another is not?

The War Revenue Act of 1917 established the charitable contributions deduction, only four years after the federal income tax as we know it was established. It’s long been a part of the U.S. tax code and isn’t likely to go away, particularly because it’s not only individuals who take advantage of the benefit. Some corporations can deduct up to 10% of their taxable income, and you can be sure that regardless of corporate goals, shareholders want their companies to reduce expenses for taxes as much as possible. Major contributions also constitute great public relations, helping prospective customers associate good deeds with the company.

Understanding that the tax deduction for charitable contributions would never go away without a major overhaul of the U.S. tax code, is there a place for additional deductions for time and effort spent volunteering?

There would be a few challenges.

• Fraud. With a financial transaction, the bank has a record that can be submitted to the IRS for proof if called upon to do so. Without an independent verification of the time spent volunteering, it would be too easy to submit false documentation and take advantage of the system.
• Valuation. How do you put a value on one hour spent as a volunteer? The value of time has always generated good discussion. Is an hour from a CEO who sacrifices the time he could be spending building a company, creating jobs, to be a volunteer more valuable than an hour from a high school student who is looking for opportunities to enhance his college applications? If the CEO spends his time stuffing envelopes with fundraising postcards and the student takes an hour to organize an event having a direct impact on an elderly community, is each hour rated the same?

These issues are not insurmountable, but it would take some planning to develop a method of making the tax deduction verifiable and fair. With tax policy set by lobbyists, we may never see an arrangement like this within the tax code. Unless corporations were to find value in spending time rather than money for charitable causes, there would not be enough pressure on politicians to change the rule.

The reader who brought this idea to my attention also asked the following: “How do we make suggestions to the tax laws? Is there a process for raising such an issue?”

The first stop is your local Representative and Senators. Send letters, call their offices, and get more people to do the same. Laws can be changed by citizens, but it would take a significant effort. If you feel strongly about the issue, convince others to take up the cause with you.

It’s almost Thanksgiving, so take a page from Arlo Guthrie’s Alice’s Restaurant. For people to change even a small aspect of the tax code, it’s going to take a movement. If you’re passionate about this idea, start websites, inspire people to follow, and change the world.

Photo: Fort Meade
Congressional Budget Office

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