Giving to a charitable organization feels good. Some people give to take advantage of the income tax benefit; others give because they believe it is a social responsibility. No matter the reason, giving money to a charitable organization or cause is a very personal decision.
The IRS reports there are more than 1.5 million registered non-profit, charitable organizations in the U.S. So, how do you identify the right charity for you, and how does charitable giving affect your finances? Some donors focus on donating to causes that best represent their personal interest, other donors focus on an organization’s “charitable efficiency,” which is the expense ratio of the amount of revenue spent on administrative overhead compared to the amount used to provide the charitable work and programs.
There are many online resources that review and evaluate charitable organizations in the U.S. They base their rankings on specific criteria related to the organization’s finances, program efficiency, growth, and historical record of accomplishment. For instance, charitynavigator.org and guidestar.org provide a “snap shot” of a charity, an evaluation of the charity and a rating of the charity – based on their choice of specific criteria.
After you’ve completed your due diligence and sifted through the 1.5 million charities to determine which one you want to support with your gift, the next question you should ask yourself is: What will be the financial impact of my giving on my personal finances?
Let’s talk about the two most significant financial effects of your charitable giving: the reduction in available funds for your personal use, and the effect it will have on your federal income tax obligation.
The reduction of personal funds means you’ll have less to spend. This means you’ll need to plan your giving. It sounds trivial; however, charitable giving – whether to your church or your favorite organization – becomes an “expense” in your monthly budget planning. While giving to your favorite cause is good, you don’t want to do it at the expense of not being able to pay your mortgage or the electric bill. If charitable giving is included in your monthly budget, you’ll better understand its impact on your monthly finances, and it will be more likely that you can sustain your charitable giving over the long term because you’ve planned for that expense.
The financial impact on your income tax obligation depends on the dollar amount you give each year. A qualified charitable gift is an authorized tax deduction on your Federal income taxes filing. Meaning that, in the eyes of the IRS, you gave away money you earned so you will not pay taxes on it. However, the word “qualified” is very important. You cannot simply give your money away to any cause and expect to receive a tax deduction. The organization must be a qualified 501(c)(3) organization meaning it has a special designation letter from the IRS stating they are a qualified, tax-exempt organization. Charitable organizations should provide receipts for donations over $250 in order for donors to claim the charitable donation deduction on their taxes. Remember, it is a deduction NOT a credit. It reduces your taxable income but it does not create a tax refund.
No matter which charitable organization you decide to support, if you’ve done your research, evaluated the impact on your budget, and keep records for your annual tax filing, you’ll enjoy the opportunity to support others less fortunate or causes which have personal meaning.
Jonathon Rowles Captain, USMC (Ret.)
Disclaimer: (have to do it) – This blog should not be considered financial, investment, legal or tax advice. Consult your licensed financial professional, tax advisor or legal counsel. This blog is for educational purposes only.