The holidays are both a time for charitable giving and for wrapping up the tax year, and with a little upfront planning the two activities can complement each other nicely. With high-income earners facing higher tax rates this year, there may be even more incentive to maximize donations in order minimize the payment to Uncle Sam.
The affluent aren’t the only Americans who give their earnings back to the community. In fact, middle-class Americans give a higher percentage of their income to charities than the rich, according to a study last year by the Chronicle of Philanthropy. Households that earn $50,000-$75,000 give an average of 7.6 percent of their discretionary income to charitable causes, while households making more than $100,000 gave just 4.2 percent.
Donors need to make sure that they’re maximizing their charitable deductions, and ensure that a charity makes the best possible use of their money. Here’s how to stretch your donor dollars as much as possible:
Do good for yourself (and your taxes)
In general, you need to itemize your deductions in order to deduct giving on your taxes. One exception: The American Taxpayer Relief Act of 2012 extended through 2013 the ability for someone aged 70 1/2 years or older to transfer up to $100,000 from an IRA to a charity tax free, says James Osborne, president of Bason Asset Managmenet in Lakewood, Colo.
Any donation worth more than $250 requires a letter from the organization that includes a description of the item or the amount of cash and whether you received anything in return for the donation. (If you did receive a gift or service, you’ll need to subtract its value from the amount you contributed.)
Non-cash donations are receiving higher scrutiny these days. "People over-value the junk they leave at the Salvation Army," saysCPA Robert Seltzer of Los Angeles. You can claim only the reasonable market value you might realize by selling something used; that’s generally a fraction of what you paid for it.
A good rule of thumb for valuing goods is 20 percent of its original value, but that number can vary. Antiques or up-to-date tech equipment will likely retain more of its value. Many charities have programs where you donate an old vehicle. But unless the charity retains the vehicle for a substantial time frame and uses the car, your write-off is limited to the amount the charity gets for selling the car. Any non-cash donation of more than $5,000 requires an independent appraisal in order to be claimed on your tax return.
Another way to save on your taxes is by donating stocks that have gained significant value, , says CPA Steven Hirsch or Mineola, N.Y.-based Cohen Greve & Company. If you’ve held the stock for at least a year, not only will you get a nice tax deduction, you also avoid paying the capital gains taxes you would have paid if you sold the stock at a profit. (If you give a stock that has depreciated to a charity, you’re not allowed to take the capital loss.)
If you own a business, instead of giving gifts to clients and vendors, consider making charitable donations in their names. Gifts are limited to $25 per person per gift, but the entire qualified contribution to an IRS-registered 501(c)(3) charity would be deductible.
Checking the charity
Aside from the tax benefits, you’ll want your money to go to a good cause and be well used. First step is to find a good potential match.
"What are you passionate about?" says non-profit consultant Dani Robbins. It's not enough to say "kids," she says. Do you want to support kids with disabilities, at-risk kids, or scholarships for high school students going into a particular field? Be specific.
Seltzer suggests concentrating your money; since all charities have a cost to acquire and process a donation, the more organizations you split a fixed amount among, the more money eaten up in administration and processing.
In the same spirit, donate directly to a charity's site or send a contribution rather than giving the money to a fundraiser. For-profit fundraising firms hired by nonprofits often keep the majority of donations for themselves.
Once you’ve got a good candidate, make sure the organization’s tax-exempt status is up-to-date by searching the IRS’ database of exempt organization. Next, you’ll want to get a sense of how much of your donations actually goes to the cause you’re trying to support, versus the charity’s costs for fundraising and overhead.
Finally, look up the organization on GuideStar.org to evaluate its reputation and effectiveness, and use CharityNavigator.org to find ratings on financial effectiveness and strength as well as charity to donors. A search on the Better Business Bureau will also give you a sense of whether there have been any donor complaints against the organization.