Are you planning on making a charitable donation this year? If so — first of all, good for you. Secondly, you probably already know where this article is heading: I’m going to talk about how to make sure you can write off your donation on your taxes (with my three charitable giving tips of course).
But first, I’d like to issue a disclaimer: You shouldn’t make a charitable donation purely for the sake of getting a tax write-off. There are two reasons why I advise this. First, the math doesn’t make sense. Making a donation just to get a write-off is the equivalent of spending $1 in order to save 25 cents or 28 cents or 33 cents (whatever your effective tax rate is).
Charitable contributions are tax-deductible, not tax credits. What’s the difference? A tax deduction lowers your taxable income. A tax credit is, well, a “credit” that’s applied to your balance owed.
- Taxable Income: $50,000
- Deductions: $5,000
- “New” Taxable Income: $45,000
- Effective Tax Rate: 25%
- Tax Owed: $11,250
- Taxable Income: $50,000
- Deductions: $0
- “New” Taxable Income: $50,000
- Effective Tax Rate: 25%
- Tax Owed: $12,500
- Tax Credit Applied to Bill: $5,000
- “New Tax Owed: $7,500
This is an oversimplified example that’s meant to illustrate how tax deductions vs. tax credits impact your taxes. You’ll never actually have zero deductions (since everyone gets at least a standard deduction), but this example is meant to illustrate a concept.
The moral of the story? As you can see in the above example, giving $5,000 to charity would only result in a tax savings of $1,250 (the difference between the total tax owed in Scenario B vs. Scenario A). In other words, you save 25 cents for each dollar you spend.
In short: Don’t give to charity just for the sake of lowering your taxes.
But don’t misunderstand me; I’m not advising you to avoid giving to charity. I’m simply telling you to give for the right reasons. I’d like to diffuse the myth that charitable giving is “profitable.” If you choose to give, you should do so because there is a cause that you want to support, and you’re willing to give 75 cents on the dollar in order to lend your efforts to that cause.
If it helps, re-conceptualize giving in this way: You and the government make a pact to donate together. For every 75 cents that you throw in, the federal government will chip in another 25 cents.
Does that make sense?
Okay, with all of that said, if you’re planning on giving to charity, here are tips to help you make sure you can get the maximum tax deduction.
Charitable Giving Tip #1: Document, document, document
If you write a check or make an online e-donation with your credit or debit card, documentation is easy enough. You’ll have a paper trail proving precisely how much you gave.
But if you give donations of goods such as furniture, clothes, used cars or other items, you should carefully document both the item and it’s value. Take photographs or shoot video, showing the item’s quality and condition. Get a signed receipt from the organization that states the value of the object that you’re giving. Keep two copies of all this documentation (in case one file gets damaged) and hang onto these for at least 7 years, just to be on the safe side.
Charitable Giving Tip #2. Assess Charities
Don’t assume that every charity will do an equally good job of handling your money.
You probably read reviews on Amazon before you buy a product, or look at Yelp reviews before you go to a restaurant. Similarly, use online rating services to evaluate how well a charity is run before you hand over a donation.
The BBB Wise Giving Alliance, Charity Navigator, and GuideStar are three well-respected organizations that evaluate and rank a wide variety of charities.
Charitable Giving Tip #3: Give global and local
For the best of both worlds, consider giving to both global or national causes (such as curing heart disease, saving the rainforest, aiding animal sanctuaries, or distributing vaccines in developing nations) as well as contributing to smaller local causes that don’t necessarily garner huge headlines.
Maybe your community has a small wildlife refuge that could use some donations to help pay their utilities bills, or perhaps your neighborhood has an organization that gives orthopedic assistance devices to those in need.
Turn your attention to both global and local causes, and identify how you can play a role in matters both big and small.
What charity do you like to support?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.