Money 101: Do Good With Charitable Donations – And Get Deductions, Too!

The onslaught of tax return documents starting arriving in my mailbox a few weeks ago — from banks and places of employment (I had a few last year) — and I began to feel the familiar and perennial angst; tax day is coming! I stuck most of them in a pile to be looked at later, you know, like in March. But when I spotted a letter from my church the curiosity got to me. What I didn’t expect was to be so disappointed in myself. It listed my total donation from the past year and it was paltry! Who the heck was I donating more to – my local bartender and hair colorist?

Going forward, I resolve to donate more, but I also want to find more charitable organizations that appeal to my passions and interests. Plus, I feel incredibly guilty for using those free address labels from Smile Train and not sending a check back. For some tips on how to align charitable giving with personal financial goals and be prepared for tax time, The Frisky reached out to finance expert and author Manisha Thakor.What’s the right amount to contribute? Is there a formula to follow when donating?

This is sort of like asking what’s the right number of children to have. People have very different — and often very strong — feelings about the answer. Some communities and religions encourage a 10 percent tithe. Across the entire nation, the average amount of charitable giving varies widely and, interestingly, by gender. According to a 2009 Barclays Wealth report, women in the U.S. give an average of 3.5 percent of their wealth to charity while men give an average of 1.8 percent. In these tough economic times, I think the most important thing is to give what you can through money or time, without depleting yourself financially or emotionally.

How can you be sure that the organization you’re donating to is qualified to receive donations and that it’s going to the cause itself?

To be safe, stick with entitled organizations that have received 501(c)(3) status from the IRS. Another thing to look for is the percentage of your donation that actually goes to the end cause (as opposed to overhead). I recommend choosing an organization that uses at least $0.75 of every dollar donated for charitable use — and of course a higher amount is even better. To find out, ask to see the organization’s Form 990. They have to make it public to anyone who inquires and it really shows where the money is going. To do a little more investigating, here are three reputable online resources:

What if you’re cash-strapped — can donations such as clothing also be a tax write-off? Is there a minimum dollar amount?

There is no minimum amount for giving, so if you’ve got unused clothes or other household items, by all means, give them away. To be eligible for the tax breaks associated with donations, however, you’ll have to do a couple of things:

  1. You need to itemize your taxes and list out your donations on Schedule A of your tax return. If you take the standard deduction (which two-thirds of Americans do) you won’t get the benefit. For donations of $250 or more you must have an official receipt from the charitable organization.
  2. For non-cash items you may only claim “fair market value.” So if you buy a $100 pair of pants and donate them three years later, you can only claim as your donation an amount equal to what you could get someone to pay for those pants on the open market — perhaps $25 or $30. For more details on how to define this, check out: “IRS Publication 561, Determining the Value of Donated Property.”
  3. If you donate more than $500 of non-cash items you have to file a special form (“IRS Form 8283, Non-cash Charitable Contributions”), so alas, no, you can’t give away all your fashion mistakes and expect to get a big fat juicy tax write-off!

How do you suggest logging your charitable donations?

Personally, I keep an old fashioned manila folder in my filing cabinet labeled “Charity.” At the start of each new year, I staple a white sheet on the inside flap and write my goal at the top. As the year progresses, I keep a written log of what organizations I gave money to and the dollar amount, and inside I keep the supporting paper documentation. When tax time comes, I can give my accountant a photocopy of the top sheet and I have all the backup paperwork in an easy-to-file away format. For those who go paperless, you can easily do the same thing with a simple Excel spreadsheet and a scanner for your receipts.

Can you offer our readers some tips for finding charitable organizations? Any personal charities you recommend?

My best tip is to set a giving strategy at the start of the year. Determine whether you want to give a set percentage, dollar amount or number of hours. Decide what kind of organizations and causes you want to support. If you can afford it, create a miscellaneous fund to support friends and family who may ask for donations for various charitable runs or bike races, etc. they are participating in.

Having a giving strategy helps in two ways. First, it gives you a benchmark against which to judge your progress throughout the year. And second, it provides a backstop for those times when you get random requests for donations. As far as charitable organizations, I’m a big fan of those that may not be household names yet, such as The Girl Effect, which is seeking to change the face of the future by investing in the education of women and girls globally.

What about you, Frisky readers? Share your suggestions for charitable organizations and giving in the comments!

Visit Manisha’s website for more money tips. Also check out her new online course, Money Rules, here.