Irma, Harvey and Marie. How to Help!
Helping With Relief Efforts
As the headlines continue to discuss disaster after disaster, many are wondering how they can help with the hurricane recovery efforts. While the tax issues are clearly secondary, here are a few issues to consider when deciding how much to give in order to help with the relief effort.
Tax Issues in Charitable Giving
The good news is that there are many ways to donate in order to receive a tax deduction. While the deduction should not be a primary motivation for the contribution, it does offset the “out of pocket” cost of what you give. For example, if you contribute $1,000 to a charitable organization and are in the 28% tax bracket, the actual cost of the donation is only $720. The government subsidizes the contribution by allowing you to deduct that amount from taxable income. The $280 difference is the tax savings from the deduction.
As you can imagine, there are several issues that must be confronted before assuming that a donation is tax deductible. The most important issue is that you must contribute to a recognized charity in the eyes of the Internal Revenue Service. They must be designated as a 501 (c) (3) charity. This means that the IRS has recognized the organization as a charity and will allow a deduction for contributions to it. How do you make sure that the Organization is a 501 (c) (3)? You can look on its website, call the organization or look on the database of charities provided by Guidestar.
What Can I Give and How Much Can I Deduct
The first question that you need to ask is whether you can itemize your deductions. If you can itemize (total deductions of $6,350 for individual returns or $12,700 for married), then the deduction will save you taxes. If you cannot itemize, then there is no help here, sorry to say.
Deductions are based on two things, your adjusted gross income (AGI) and what you give. If you give cash, a deduction is allowed up to 50% of your AGI. While this seems simple, there may be more creative ways to give.
You can contribute appreciated stock or other securities directly to the charity and receive a deduction for 100 percent of the fair market value. There is no tax to be paid on the capital gain portion of the stock, and you can deduct the entire amount provided it is less than 30% of your AGI. In the example above, instead of giving cash of $1,000, you could contribute stock that you bought for (as example) $500 and is now worth $1,000. You would receive the same tax deduction of $280 and not have to pay any taxes on the gain! What a deal!
Other Ways to Give
- Direct IRA Distributions
If you are over 70 ½ years old and need to take a minimum distribution from your IRA, you can have the funds distributed directly to a qualified charity and avoid having to recognize that income. This may have benefits in other areas of your tax return. Talk to your financial advisor or CPA for further details.
- Donor Advised Funds
Similar to a private foundation (but much less costly to organize), a donor advised fund offers an easier way to make a significant gift to charity over a long period of time. A donor advised fund actually refers to an account that is held within a charitable organization. Once you transfer assets to the account, the charity is the legal owner of the funds and has ultimate control over them. You can only advise as to how the contributions will be distributed, but not completely control where the funds will go.
- Matching Funds
Another way to make your money go further is to see if your employer or other organization will match your contribution. Often in times of crises, employers will match employee donations for certain causes. Facebook recently launched a campaign to match up to $1 million of donations. If this is available, your contribution will do double duty!
A final word… while most people hear of tragedies like the recent hurricanes and want to help, there are others that see it as a way to set up a scam. Don’t fall prey to these. Do your research before you contribute. Research any specific charities through a web site or other medium and do not be afraid to call them and ask questions. Large organizations can be checked through Charity Watch, Charity Navigator and other local sources.
A few cautionary steps and a little help from the IRS will ensure that your dollars have the most impact and provide the most relief possible!