Pay It Forward and Get Some Cash Back: Generosity and Taxes

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Donating to charities should be regarded as a way of thanking the society and divinity for what you have accumulated so far. However, due to fiscal provisions, gifts to nonprofits can become an investment and a way to get some tax relief. Of course, we don’t advise anyone to consider it just a ticket to more money, but a savvy financial person will not pass on the opportunity to do good for others and themselves.

Choosing a (tax) worthy cause

There is no shortage of non-profit organizations you can support and most likely there is one for any cause you can imagine or might have a soft-spot. Animals, education, women’s rights, child protection or medical research all are worthy of your dollars. There are over 1.5 million organizations to choose from, and Forbes provides a list of the top 100.

First, decide on the domain you want to donate to. Then, get as specific as possible. For example, don’t just say you want to support women. Do you want to help them to get an education, start a business or raise their children as single mothers? If you chose to donate to women’s education, do you focus on primary, secondary or upper education? Repeating this process a few times will help you narrow down the list of options to 3-5.

Now it’s time to check with the IRS if the organizations on your short list qualify as 501(c)(3) nonprofits to give you the tax exemption advantages you are hoping for. You can only get the benefits if you donate to an organization registered in the US, even if the causes they support are abroad, like disaster relief.

Donations to individuals, no matter how worthy or touching their story is don’t count. Also, you won’t be eligible for deductions if you give your money to political parties or organizations that also have a lucrative goal.

Perform due diligence

Before signing any checks of even donating through SMS be sure to verify that the charity you intend to support is genuine. Usually, it is best to do your homework and choose an organization after some research. Don’t give into social pressure or a call agent’s pitch. It’s a good idea first to volunteer a few hours at the organization to understand how they work and if it is something that you would like to be part of.

Look at the public tax reports and what they do with money. The percent given to the program should be a few times larger than the one used for administrative purposes. Take some time and look at the members of the board and other people associated with the organization. Do a bit of background research on them and make sure they are not part of commercial organizations you don’t support, to avoid remorse.

Contact the charity and ask if they are knowledgeable and willing to provide written a proof of donations to help you with your tax file. A reputable and genuine organization will have a clear process for this and even provide counseling or evaluation.

You can take advantage of the tax exemptions only if you itemize your tax deductions, for the standard deduction there is no other waiver. If you are married, talk to your significant other about this, since if one of you itemizes tax deductions, the other one is forced to do the same. On the other hand, there is no limit to your contributions, and each can choose a different charity.

Red Flags

A simple Google search will give you the names of the organizations that are not worth your dollars. We provide a general list of recommendation that helps you identify those who could even qualify as scams.

  • Avoid contributing to charities during the holiday season and don’t make cash payments. Only use transfer channels and get a paper in return.
  • Don’t give in to a telemarketer’s pressure. Good organizations have volunteers, not paid staff.
  • Ask for contact details and other identification data. Search online for accuracy and contact the organization yourself, even visit.
  • Ask for the percentage of the donations that are distributed to the actual cause, don’t give a dime until you know and have verified the number.
  • Never give card numbers or social security numbers over the phone.

Money donations vs. In-kind donations

The IRS states that: “In general, contributions to charitable organizations may be deducted up to 50% of adjusted gross income computed without regard to net operating loss carrybacks.  Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30% adjusted gross income (computed without regard to net operating loss carrybacks).”

For in kind donations deduction is equal to market value. Be sure to make a list and receive a receipt from the charity of your choice. To accept such gifts, the items but be in good condition. If the total value is over $500, you need an appraisal.

If you intend to donate a used vehicle, the procedure depends on whether the charity keeps the vehicle or actions it. To collect all the benefits, use the Internet to determine the fair market value. For a car less than $5000, you need form 8283 for the IRS. More expensive vehicles require a specialized appraisal.

If you have a hard time determining fair market value try these resources:

You will not receive a receipt for your work as a volunteer. Therefore, you can’t expect any other benefits from this activity except for the feeling of accomplishment.

Ready to do a good deed?

Start small and first clean up your house. Fill in large cardboard boxes with items that are in good shape and make lists of what is in each box and their fair market value, computed on the lower end. Sort the boxes based on the needs of each charity you intend to give them to.  Be sure to get receipts, not just drop them in the donation box.

Next, if you are in the upper-income brackets and itemize your deductions, be sure to find some worthy charity and be generous.

Last, but not least, if you are over 70 ½ and have an IRA take the opportunity of donating directly from that account instead of making a distribution. By doing so, you avoid an income-tax bill, and you can donate more without giving Uncle Sam additional dollars.

Whatever route you choose make it count and don’t think more about the dollars you are saving, but the lives you are changing.

 

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