Is giving on your mind this time of year? Not only are many of us shopping for holiday gifts, but we may also be considering year-end donations to causes we care about. Before you pull out the plastic or your checkbook, though, make sure you understand how to make your gift go as far as possible.
Some — but not all — gifts are tax deductible. The IRS requires charitable donations meet a number of criteria in order to be tax deductible. Perhaps the most important is that your gift must be given to a qualified organization. Gifts made to specific individuals or political organizations, for example, don’t count. In addition, if you received some kind of merchandise in conjunction with your donation, you can only deduct the amount above the fair market value of the item you received. And you must file Form 1040 and itemize your deductions in order to take a tax deduction.
Nolo.com points out that there are some common mistakes taxpayers — and volunteers drumming up donations — make when it comes to the deductibility of donations. The purchase of raffle tickets is never tax deductible, for example, and neither is “the value of (volunteer) hours — not even if they are highly skilled, such as a lawyer or graphic designer.”
[The Credit.com Forum: Your Credit Questions Answered]
Some gifts go further. Maybe the stock you bought several years ago when it was a bargain has done really well and you’re thinking it’s time to sell. Or maybe your second home’s value has recovered from the drop in housing prices, but you don’t really want the hassle of maintaining it anymore. You — and the charity of your choice — may benefit more if you give an appreciated asset to the charity, rather than sell it and make a cash donation. If you’ve held the property or asset for more than a year, then you can deduct the value of the donation at the time you donate it and avoid paying capital gains tax that would apply if you sold it instead. It can be a real win-win.
“The nonprofit gets the stock to do with as it sees fit with no tax complications, you’ve rebalanced your portfolio without owing any capital gains taxes and you get the charitable deduction of the long-term asset’s value,” writes Kay Bell on the Don’t Mess With Taxes blog. (Of course there are limitations, so talk with a tax advisor before you implement this strategy.)
Your donations don’t always do a lot of good. After natural disasters like this year’s fires, floods and Hurricane Sandy, numerous fundraising and donation collection efforts are launched. Some may be outright scams, while many others are well-intentioned — but may not do as much good as donors hope.
My daughter’s school, for example, recently encouraged students to donate cleaning supplies for Hurricane Sandy victims during its Thanksgiving food drive. While I appreciate their desire to give students an opportunity to help, I wondered how they planned to get those donations from Florida to the affected areas. It made a lot more sense to me just to donate to the Red Cross (with my employer Credit.com matching the contribution), rather than add to the logistical hassles of sending bottles of bleach to New York!
[Related article: 5 Fee-Free Ways to Donate to Disaster Victims]
Check out charities for yourself. Every year around the holidays, emails surface that criticize high-profile charities for excessive executive compensation, or warn recipients that very little of donors’ money goes to the actual causes they claim to represent. For example, one email claims that the chairman of Unicef earns $1,200,000 a year in salary, plus use of a “Royal Royce” wherever he goes. Most of the claims in these emails are outdated, or just plain wrong, according to Snopes.com.
But they do raise an important point: before you give, check out the charity or non-profit. Charity Navigator’s free charity ratings and GreatNonprofits.org lists reviews by donors, board members, and recipients can share reviews.
Can’t give money? Give time. Most charities rely heavily on volunteers, and your time may be just as valuable. Over the years our family has fostered cats and kittens who were awaiting adoption through local rescues. Keeping these cats and kittens in homes rather than shelters have kept them healthier and saves the rescue organizations money.
There are no doubt organizations in your community that can use your time and skills, as well. And they’re not hard to find. Dosomething.org focuses on matching teens and young adult volunteers with opportunities; Serve.org is a national initiative designed to help volunteers find ways to serve those affected by the economic downturn; and VolunteerMatch.org will help you sift through hundreds of opportunities in communities around the country.
Image: Ron Sombilon, via Flickr