James W. Reilly is my CPA. He’s honest, knows his stuff, and does a great job on my taxes. He’s also blunt and to the point about charitable giving. “From a financial standpoint, it never makes sense to give your money away,” he says. “Even when you’re in the top 35 percent marginal tax bracket, when you give a dollar away, it’s still a net, out-of-pocket loss of 65 cents—even after the tax benefit.”
Got that? It never makes sense financially to give money away. Never.
Tax deductions, who needs them anyway?
Actually, most people—unless they have a home and a mortgage—won’t receive any tax benefits for making a charitable gift to a Section 501(c)(3) organization (IRS lingo for a tax-qualified charity, an organization like the American Red Cross, the Salvation Army, or a raft of other organization to which you can make tax-deductible gifts). You see, to deduct charitable contributions, you first must be able to itemize deductions on your tax return. And for that to make sense, your total itemized deductions must exceed the standard deduction the IRS grants all taxpayers, even those who have no deductible expenses. For 2011, the standard deduction for individuals is $5,800. For married couples who file jointly, it’s $11,600. Most people—again, unless they have a honkin’ big home mortgage—won’t need to itemize their deductions. They’ll simply take the standard one.
In other words, that dollar you’re planning to give to your favorite 501(c)(3) charity? In all likelihood, it represents a net, out-of-pocket loss of exactly $1.00. Financially, that makes even less sense.
But hey, who’s counting? Charitable giving isn’t about finances. “It’s a moral question,” says Reilly, who practices in Cody, Wyoming. “It matter of your philosophy of life: Do you give back because you think life has been good to you?” If that describes your philosophy, read on.
Put your own mask on first
So, when’s a good time to start making charitable contributions? Do you wait until you’re out of school? Out of debt? Out of your mind? Reilly prefers to use an analogy from the airline industry’s pre-flight safety review. “You need to put your own oxygen mask on before you try to help someone else,” he says. No, you don’t have to be out of debt to start giving, but if you’re having trouble making one end meet the other, maybe now is not the time to save the whales. However, if you’re working and have set aside some savings, a little giving could be good for your soul.
Andrew Carnegie gave away hundreds of millions of dollars when that was a lot of money. But you don’t have to be a big giver to be a giver. Lots of foundations, churches, and food banks would welcome your contributions, big or small. I just listened to my local public radio station solicit $10 donations. Besides, if you follow the biblical maxim to not let your left hand know what right hand’s doing, nobody’s going to know the size of your gift anyway. In other words, start small and grow into this charitable giving thing. “For most people, it’s pay as you go,” Reilly says. “A thousand dollars is a lot of money to give at once. A $100 a month, that’s much easier.”
Who’s on first, and how did they get there?
Before you click on that donate button, however, don’t forget the due diligence. Not all charities are equal. In fact, many of them, including some prominent names, are way less than equal. How does your intended stack up? Among the websites that can help you answer that question are the American Institute of Philanthropy and Charity Navigator. As you review the charities covered by these sites, keep this rule of thumb in mind: how much of the money you donate will stay in-house to pay administration expenses and how much will go out the door to the intended beneficiaries? “I would never give to an organization that spends more than 25 percent of its gross donations on administration,” Reilly says. “Also, if they don’t file their annual form 990, that’s a good sign that they’re not reputable.”
Dot your I’s, cross your T’s, and get a receipt
Used to be that you could prove your charitable donation to the IRS by producing a cancelled check. Now, if you give a cash donation of more than $250.00, you need a written acknowledgement from the organization before you can deduct the gift. If you make a non-cash donation of more than $500, make sure you get a form 8283 from the organization. And if you receive anything in return for your gift—a meal, theater tickets, and the like—the charity must provide you with a list of the tangible goods and services they gave you. “So if you purchase $100 tickets to the patron’s ball of your local museum, and you get a meal worth $50 dollars, you can only deduct $50.00,” Reilly explains.
Feel good by doing good—and prosper to boot
If you’ve read this far, you’re probably ready to make that first charitable gift. But if you still need motivation, the following may help. Arthur C. Brooks, formerly the Louis A. Bantle Professor of Business and Government and currently president of the American Enterprise Institute argues that giving may be as good for the pocketbook as it is for the soul. In fact, he’s done economic numbers crunching to establish “that when people give more money away, they tend to prosper.” Apparently, giving back does pay dividends.
Gregory Taggart, a former bank attorney, is an Orem, Utah-based freelance writer specializing in financial and legal issues. When he’s not writing, he teaches American government and writing at Brigham Young University.