3 Things to Understand About Charitable Donations

With under 3 months left in 2016, you may be considering donating to charitable organizations if you haven’t already this year. Maybe your company aims to contribute a certain amount each year to needy organizations or maybe you like to set aside a portion of your yearly income to give back to the community. Either way, it’s important to understand the benefits and considerations of contributing to charitable causes.

In today’s post, we’re exploring 3 Things to Understand About Charitable Donations.

1. Make sure that you understand the charity’s mission and verify their non-profit status

In today’s fast-paced world, it can be tempting to simply donate to an organization and move on; not thinking about the donation or organization again. However, we advise that you do some research into the organization you’re considering donating to before making a contribution. While we hope all charitable organizations are truly helping the causes they support, unfortunately not all of them do. In fact, the Federal Trade Commission recommends researching an organization beforehand to prevent charity fraud scams.Two things to look at specifically with any charity are their non-profit status and their mission statement. Ensure the organization is a designated as a 501(c)(3) non-profit with the Internal Revenue Service. The process of procuring such status requires organizations to prove their donations are used for charitable purposes and to provide public financial records. It also qualifies your donations as tax-deductible.

2. Find out how donations are used

Charities are similar to businesses in that they have specific operating and administrative costs that need to be addressed each month. There are several factors, including: size, region, and length of time operating, that can alter a non-profit’s expenses. If an organization is located in a big city, the costs may be more significant than those operating in smaller to mid-size cities. If an organization is just starting there may be more upfront costs. It’s important to know how your donation is being spent. Are you okay with it going towards new office supplies? Or would you prefer the money is spent assisting the programs the charity operates? Most of us would prefer the latter. A smart rule of thumb is to donate to organizations that use 75% of all donations towards their programs. Viable organizations present their programs and plans for implementation clearly on their websites and in marketing materials. CharityNavigator is a great tool to suss charities out based on spending ratios. 

3. Tax Write-Off’s

What’s deductible and how is it deducted?For a donation to be eligible for deduction it must be made to a “qualified organization”, i.e. a sanctioned 501(c)(3) non-profit. Qualified groups include:

Many charitable donations can be used as a tax deduction on your tax forms as an incentive to give. However, the IRS does set a limit on how much money you can donate per year. The rule of thumb for max donations is 50% of adjusted gross income. You can technically donate more than this, but the excess will be allocated to future years donation limits up to 5 years in the future.

  • Churches, synagogues, temples, mosques and other religious organizations

  • Federal, state and local governments (as long as your contribution is used for public purposes)

  • Nonprofit schools and hospitals

  • Public parks and recreation facilities

  • Salvation Army, Red Cross, CARE, Goodwill, United Way, Boy and Girl Scouts, etc.

  • War veterans’ groups

  • Expenses paid for a student living with you, sponsored by a qualified organization

Like all tax deductions, it’s extremely important to keep proper documentation to prove the donation on your tax forms. In fact, based on donation level there are different types of required documentation. For contributions of $250 or more, a receipt showing the charity’s name, date, location, and description of the donation is required in order to be claimed as a deduction. For up to $500 in donations, the charity must state whether the organization provided any goods or services for the contribution. If so, the market value of the goods/services must be subtracted from the cost of the contribution. Donations over at the $1,000 level and above require additional documentation, such as specific paperwork and/or a written appraisal from a qualified professional.

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Idaho Medical Association Financial Services is a financial and wealth management firm specializing in personalized financial guidance to accredited investors in the medical field. Areas of speciality range from investment planning and retirement analysis to in-depth services such as tax analysis and strategies, insurance and estate planning and financial planning. For a free financial consultation, please call: (208) 504-1736 or email jared@imafs.org.