Who said, “We make a living by what we get, we make a life by what we give”? If you knew it was Sir Winston Churchill, pat yourself on the back. His message is still quite relevant today as many of us question how we can help others in need. And whether you’d like to help a local organization provide home heating assistance or contribute to the global tsunami relief effort, you will be twice rewarded by helping others AND lowering your tax burden.
The IRS provides a number of tax breaks for charitable giving and the guidelines for substantiating/reporting your contributions. (Remember—tax benefits for charitable contributions are available to taxpayers who itemize deductions.) Here are just a few.* (Visit www.irs.gov or call Honeck – O’Toole to learn about others.)
Rather than a cash contribution, a publicly traded security can be given to a qualified organization. These include religious organizations; governments; nonprofit schools and hospitals; public parks, conservation groups and recreation facilities; war veterans’ groups; and organizations such as the Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, etc. You can deduct the fair market value of the stock even if you have a low cost basis.
- Volunteer out-of-pocket expenses may be deducted. When you serve a qualified organization as a volunteer, you may deduct your un-reimbursed expenses such as mileage (14 cents per mile), tolls, parking fees, uniform expenses, supplies, entertaining others, and other out-of-pocket expenses.
- Works of art or other property, donated to a charity auction or event, may be deducted. If the value of the item is over $5,000, a qualified appraisal is required to substantiate the contribution. If artwork is valued at more than $20,000, a copy of the appraisal must be attached to your return.
- Computers donated to schools or other organizations may be deducted. A computer under five years old may be a valued donation. However, the folks at Microsoft recommend donating your equipment to be refurbished rather than directly to a charity or school, because they make sure the equipment is working well and runs legal copies of software. Two Greater Portland organizations provide this service: Maine Computers for Schools (Windham) and Ruth’s Reusable Resource Center (Scarborough) www.ruths.org/.
Substantiating Your Contributions
The IRS reminds taxpayers to keep appropriate records to substantiate the value of their gifts.
- For contributions of less than $250, you must keep one of the following:
- a cancelled check, credit card receipt, or EFT receipt
- a letter from the charity acknowledging receipt of the contributions
- or, another reliable written record of the contribution (for example, if you drop off an item at an unattended site, just keep a reliable written document including item, date, value, and organization name
- For any single gift of $250 or more, you need a written acknowledgement from the charity that includes the amount contributed and a description. Separate contributions, of less than $250 each, do not require this acknowledgment.
- For donated property valued at more than $5,000, you must obtain a qualified written appraisal.
- Cash contributions made through payroll deduction are considered a separate contribution and can be substantiated through a copy of the pledge card or your pay stub.
- Contributions of services are not deductible, but you may deduct certain expenses incurred while performing the services, as long as you keep all receipts, cancelled checks, etc.
* Sources: RIA, an organization that provides information to tax and accounting professionals. The IRS Web site and Publication 526: Charitable Contributions.
How to Find a Reputable Organization
With 600,000 to 700,000 charities currently registered in the United States, the task can be a daunting one, so performing the proper due diligence is crucial. Here is some advice if you’re searching for reputable organizations.
- Contact the proposed charity directly, and ask how much money the organization spends on fund-raising and administration and how much goes to the cause. Most people believe charities spend as much as 50% of their proceeds on fund-raising. In fact, successful organizations may spend much less. Donors should look for a charity that spends 40% or less on administration.
- If possible, visit the offices of the prospective charity and meet the people in charge. Some charities need volunteer time more than they need money. A personal visit can help a prospective donor figure out whether a cash donation or a few hours of volunteer time a week better meets its needs.
- Talk to others in the community to get their view of the charity. Some small charities may not be easy to reach or visit. Talk to people who have volunteered or donated money to find out if a charity is run efficiently and delivers on its mission.
- Use the Internet and other sources to research the charity.If the charity has a Web site, you should find all the information you need on the organization and the causes it supports. Other helpful Web sites include:
- www.irs.gov. All charities that collect more than $25,000 annually must file an annual information statement. You can get a glimpse into the charity’s overall financial health.
- www.guidestar.org. Locate charities based on subject, state, zip code or other criteria.
- www.ncib.org. The National Charities Information Bureau rates 400 national charities and assesses how they work. (There is a fee for this information.)
- www.nsfre.org. The National Society for Fund-Raising Executives holds its members to a strict code of ethics requiring the largest possible percentage of funds raised to go directly to the cause supported.
Source: Adapted from information provided by www.eCharity.com, a Web site that enables donors to make charitable contributions online at no cost.
Our financial articles are presented by Honeck O’Toole, Maine-based certified public accountants. If you ever have questions about your finances, email us or call 207-774-0882.