Giving Can Give Back
Columnist: Roger Gainer
January, 2007 Issue
Americans give a lot to charity. In 2005, we donated an estimated $260 billion according to a survey published by Giving Institute (formerly the American Association of Fundraising Counsel). Some give because they enjoy it, some feel bad if they don’t and some just always have. But there’s another popular reason people decide to participate in charitable giving—it can give back.
Most people know they can get a considerable amount of money back by itemizing their taxes. Those who take a standard deduction receive no additional tax benefit for charitable contributions. But those who itemize at tax time can see a significantly lower after-tax cost of their gift. About one-third of all filers itemize, according to the IRS.
Itemized deductions reduce your taxable income by the total amount you contributed to qualified tax-exempt organizations. According to Charitable Choices, a nonprofit organization that helps qualified charities jointly promote themselves in workforce fund-raising campaigns, the tax saving usually equals the deduction multiplied by the marginal tax rate. This is the tax rate you pay on every dollar you earn above a certain amount. For example, if you earn $60,000 a year, your marginal tax rate is 25 percent. For every $100 you give to charity, you pay $25 less in federal income tax. Keep in mind, though, only contributions made during the tax year are deductible. For example, if you pledge $500 this May but only give $200 by December 31, your deduction would be $200. You can deduct credit card charges and payments by check in the year they are given to the charity even though you may not pay the bill or have your account debited until the following year.
Sound confusing? It can be, but the good news is there are experts who can help. If you have a tax question or financial concern you’re unsure of, don’t hesitate to seek the advice of a professional you can trust.
In the meantime, here are some tips on charitable giving that can help you give and get back.
Research your target charities. The last thing you want to do is give to any random charity. Learn about the organization before you write a check. It’ll make it easier to give if you know more about the organization’s achievements and goals. It could benefit your life or the life of someone you love.
Don’t give cash. Always make contributions by check—and make your check payable to the charity, not to the individual collecting the donation. This will ensure the money goes directly to the organization and not to someone who may be scamming you (or the charity).
Keep a record of your donations. Hold on to all receipts, canceled checks and bank statements so documentation will be easier come tax time.
Learn the language of giving. For example, “cash contributions” don’t simply mean cash. Any direct financial support to a charity is considered a “cash contribution,” regardless of your method of payment.
Tax exempt doesn’t always mean tax deductible. “Tax exempt” simply means the organization doesn’t have to pay taxes. “Tax deductible” means the donor can deduct contributions to the organization on his or her federal income tax return.
If you have charities you plan to donate to regularly, request a copy of their latest annual report, a list of board members and the group’s latest financial statements. This information should give you a clear idea of the kinds of programs it operates, how and where these programs are carried out and how much is spent on the programs (as opposed to, say, administrative costs). If you don’t have time to review the statements in detail, at least compare the charity’s expenses to its income. If something looks confusing, ask for your financial adviser’s opinion.
Roger Gainer has been a chartered financial consultant for more than 18 years. His main focus is helping clients prepare for retirement. You can reach him at (415) 331-9030.
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