By Catey Hill
December is usually the month when Americans give the most money to charity. For most of us, this charitable giving means simply writing out the same check for the same organization that we gave to last year and the year before. But advisers say that whether you’re giving to the same old charity, or contemplating somewhere new, it’s important to know about everything from the tax implications to the charity’s preference on payments to ensure that your dollars make the most impact.
Experts say gifts to charity are even more important this holiday season when every dollar is tight. Charitable giving this year will be at least on par with 2010 (at $290 billion) and will most likely exceed it, though it will still be nowhere near the pre-recession high of more than $310 billion in 2007, says Rick Dunham, president and CEO of Dunham + Company, a global consulting firm focused on nonprofits. This year, 78% of donors say they plan to keep financially supporting the charities they have in the past, according to new study by the company. Among people who give online this trend is especially pronounced, with 85% saying they will continue to do so. Thanksgiving and Christmas are when the highest number of donations come in, so we’ll see a lot of money coming in this month,” says Sandra Miniutti, vice president of Charity Navigator, an independent charity evaluation site.
So where are people donating money? The current trends indicate that charities focused on arts and education are increasingly popular. Last year, gifts to both were up more than 5% compared to 2009, according to the latest Giving USA survey. Donors are also interested in international affairs organizations, which often support relief efforts. Giving to these organizations jumped more than 15% over that period. Giving to religious organizations remained flat and giving to human services organizations like homeless shelters fell 1.5%, the survey says.
With that in mind, here are five steps to make the most of charitable giving.
1 Do a background check
There are a number of sites, including Charity Navigator and GuideStar, that give details on how individual charities spend their money, experts say. To evaluate the financials of a charity, compare the overhead/administrative costs to the direct service costs (the costs of the actual charitable work), says Durham. It is normal for organizations to spend about 20- 30% of the overall cost to run the organization on the administrative costs that are related to the services provided, says Durham.
But neither Charity Navigator nor GuideStar lists every single charity on its site. So, for smaller organizations, ask for the Form 990, says Miniutti, which will detail expenses. Then, check out this guide for more information on how to read those statements.
Miniutti also advises donors to look for organizations with independent boards, whistle-blower protections and policies to avoid conflicts of interest. “These help prevent scandal,” she says, such as misuse of funding or improper use of assets. Dependability is also important, says Durham. “Some organizations like the Salvation Army have clear, historical reputations.” Barring that, “ask your network of peers who they give to and why,” he says.
2 Check the tax implications
In return for a charitable gift, the giver gets a nice tax deduction. But there are a number of rules one should follow, says Rande Spiegelman, vice president of financial planning at Charles Schwab. He advises clients to itemize on their tax return. It’s usually only worth itemizing if all deductions, including charitable donations, are above the standard deduction amount, which is $5,800 for singles and $11,600 for married people filing jointly. Itemizing can lower the total amount of income one is taxed on.
Secondly, he recommends requesting a receipt from the charity for donations of $250 or more. The IRS typically requires receipts for these transactions. (Note that donations to political parties, labor unions, for-profit school and hospitals are not tax deductible.) The form a gift takes is important too. “For example, cash donations are usually fully-deductible, whereas you may only be able to deduct your cost basis on property unrelated to a charity’s mission,” says Spiegelman. Click here for a more detailed description on deducting charitable donations.
3 Ask the charity how it prefers to be paid
Charities often must pay between 2% to 5% of the total transaction fee when gifts are made by credit card, says Miniutti. That fee can eat into the gift. On the other hand, it costs money to pay someone to open the mail and deposit checks. Miniutti suggests asking the charity what its preferred method of payment is. Some now have online donation methods with very low overhead, she adds.
4 Give appreciated stock
“This is one of the most cost-effective ways to give,” says Durham. The reason: It helps givers avoid the capital gains tax. Let’s say one bought a stock for $500 and it has appreciated and is now worth $1,000. By donating the $1,000 stock to a charity, the giver won’t pay taxes on the $500 worth of gains. By selling the stock, one has to pay taxes even if the proceeds are then given to charity. Click here for further details on how to give appreciated stock.
5 Consider donating time
Those who would like to give back but have tight budgets may consider volunteering, says Spiegelman. “You’ll feel great, and although time spent volunteering isn’t deductible, transportation and related expenses are,” he adds. Volunteering can also be a resume booster, says Miniutti. Click here for details.