See the results of our 2022 Personal Finance Study!
Everything You Need to Know About Charitable Giving
The national protests born out of continued police brutality and racial injustice have sparked great change for America. They opened a dialogue about how to take action, with millions marching, signing petitions, and writing letters.
Another great way to make a difference? Charitable giving.
Whatever your cause, spending on others is just as important as spending on yourself — whether you have one dollar to give or a million. In fact, 73% of Americans donate to charitable causes, even if giving has declined over the years.
But how do you get started, and what do you need to know to take advantage of tax benefits for donations? Here are answers to your questions so you can support the causes that matter to you.
How do I choose an organization?
Identify a cause
Identify a cause to which you want to donate. What issues are close to your heart? How do you want your donation to make a difference?
Support the fight for equity. Enable access to education. Fund medical research. Combat homelessness.
No matter which cause you choose, take action and do your part. And remember any amount helps — whether it’s a few dollars or a million dollars.
Find an organization
It’s time to find the right organization that matches your cause. Is there a local organization that can make a difference in your community, or a national organization to reach a broader audience? Research and pull together a list of possible options.
Keep in mind two criteria while searching for organizations:
- Tax exempt status
If you plan to deduct your charitable donation on your taxes, then choose an organization that meets the IRS requirements of tax-exempt status.
An organization must also be legitimate to ensure your donation is effective. What percentage of your donation amount will ultimately reach the cause? Make sure the charity is financially healthy, which means the organization isn’t using your funds to meet a financial deficit in operating costs.
How do I know if an organization is legitimate?
Before donating, research an organization’s legitimacy. Unfortunately, scammers take advantage of turbulent periods to benefit themselves. Doing your due diligence is the best way to stay informed about where your money is going. Look for transparency and accountability.
Consider the following questions as you research each charitable organization:
- Does the organization indicate which cause it supports?
- Does it provide information about those involved and the programs or people it benefits?
- Do you know what percentage of your donation will directly support the cause?
Use one of these trustworthy resources to learn more about each charitable organization.
The Better Business Bureau created a charitable giving network to help donors evaluate organizations. The BBB Wise Giving Alliance uses standards of accountability to measure each charitable organization.
Charity Navigator rates charities based on transparency, accountability, and overall financial health. The website includes more than 9,000 rated charities.
Charity Watch rates charities according to specific criteria, including efficiency, accountability, and governance of charitable organizations. The website also has a members-only option that provides access to more detailed reports.
This website maintains up-to-date information on nonprofit organizations. GuideStar can help you evaluate the legitimacy of a charity organization thanks to readily available financial documents, including how donations are spent.
The Internal Revenue Service has its own database to verify tax-exempt organizations. Use the tool, “The Exempt Organizations Select Check Tool,” to search for the tax-exempt status of an organization. Remember, if an organization isn’t exempt, then your donation isn’t tax deductible.
How do I give?
There are countless ways to donate to your cause. From writing a check to sending money virtually. You can make a donation of any amount by choosing one of these two popular options.
Grab your debit or credit card and get online. Digital donations can be made through an organization’s website, a crowdfunding website like GoFundMe, or directly to an organizer via Venmo. The best part is that donors can give any amount of money online — even $1. No wonder online donations are one of the fastest-growing methods of giving. And Gen Z and millennials, in particular, prefer the digital ease.
Write a check
Although online giving is becoming more popular, writing a check is still the go-to for many. Writing a check is simple and direct. A check is also secure — and perhaps a safer route than an unknown website.
How do I write off taxes?
Check to see if you qualify
To claim a tax deduction for a charitable donation, the organization that you donate to must meet IRS standards for tax-exempt status.
Qualifying organizations typically include:
- Religious institutions
- Cultural organizations
- Public parks
- Federal, state, and local governments
- Hospitals and clinics
Keep a record of donations
Keep a record of each tax-deductible charitable donation. It’s important to have proof of the monetary donation to provide to the IRS. While the IRS doesn’t always take a close look at tax returns, why take the risk of penalization? Better safe than sorry.
When requesting a receipt from the charitable organization, make sure it includes the following information:
- The organization’s name
- The monetary amount donated
- A description of items donated
- A statement addressing whether goods or services were received in exchange for the donation. For example, did you receive tickets to a charity event after donating? If so, the cost of the perks must be subtracted from the amount donated, when filing.
File your taxes
Are you entitled to a charitable contribution deduction against your income tax? Then plan on itemizing your deductions.
When filling out a tax return, you must choose whether to itemize deductions or take a standard deduction — an amount predetermined by the IRS. Opt to calculate the itemized deductions. This way you can include certain expenses, such as charitable contributions, in order to lower the amount of taxes you owe.
Keep in mind that a charitable donation is deductible in the same year in which it’s made — meaning the final day to donate is December 31 of the year you plan to claim a tax deduction.
For 2020, you are allowed to deduct up to 100% of your adjusted gross income (AGI) on monetary donations to qualifying charities. This is thanks to the CARES Act, which temporarily increased the AGI limits on cash contributions. In previous years the limit hovered around 60% of AGI.
Now gather your paperwork, itemize your deductions, and file your taxes like normal.
Why should charitable giving be part of my budget?
We asked personal finance educator Scott Henderson why it’s important to account for charitable giving in a budget and tips on how to do it.
“First, because it's the right thing to do and it makes you feel good,” Henderson said.
Giving makes us feel good and it’s good for our health, according to a Harvard Business School study. And this positive outlook extends to other areas — upping an appreciation for others.
“Second, the best way to leave a lasting impact on the people and organizations around you is to give to charity,” Henderson said. “Making room in your budget, even if you don't feel like you make much money, will not only benefit you, but could benefit the causes you care about for many generations.”
Here are Henderson’s top three tips to make charitable giving a regular fixture in your budget:
No. 1: Decide on a percentage of income to give to charity
Henderson recommends giving 10% to 12% of your income to causes in which you believe. For instance, you might donate 10% annually to your preferred charity and then use the remaining 2% to donate to different causes each year.
No. 2: Set up a donor-advised fund
Charitable donations come with tax advantages. One of the best ways to take advantage of tax benefits is by setting up a donor-advised fund (DAF), said Henderson. A DAF is a charitable savings account that allows you to contribute money without choosing a specific charity right away. You can spend the money at any time. But until you do, it will grow tax-free.
No. 3: Create an estate plan
How do you plan to divide your assets after you pass away? Henderson suggested creating an estate plan. Including a charity organization in your plan is a good way to leave a lasting social impact.
Remember, your donation can positively impact someone’s life — whether on an individual or communal level.
Don’t doubt the impact that your charitable donation can make no matter the amount. Join others in funding worthy causes.
Scott Henderson is the marketing manager at Qube Money and he runs a successful online blog Simplifinances. Scott is an accredited financial counselor and has been featured in major publications such as Fox Business, U.S. News & World Report, The Simple Dollar, and many others. He holds a business degree from the University of Utah and a master's degree in personal financial planning from Texas Tech University.