Giving to Charity as a Budget Item
- July 15, 2020
- by Michael
As you create your budget, a nice "feel good" line item is giving to charity. Many people donate when they can or when they are asked. Others have charitable donations built into their budgets and make regular contributions to their favorite nonprofit. In either case it is an expense that should be tracked.
Why donate to charity? Many reasons:
Donating to charity...
- makes you feel more connected to your community.
- is an altruistic thing to do, an unselfish act that puts others first.
- gives you the feeling you are building a better world.
- says “thank you” in a powerful way.
- feels good to put your money where your opinion is.
- sets a good example for others.
Ideas of Places to Donate To:
Here is a list (in no particular order) of the types of places you might donate to:
- Homeless shelters
- Food banks or local soup kitchen
- Social justice groups
- Animal shelters
- Local schools
- Local arts and entertainment societies
- Your favorite independent news outlet
- Medical research (cancer, HIV/AIDS, rare diseases, etc)
- Local museums
- Scholarship programs
- Parks and outdoor preservation
- Women’s rights organizations
- Mental health organizations
- Environmental organizations
- Political campaigns
On a macro scale is GoFundMe’s list of the 30 best charities.
Honestly it should not be hard to find places to donate to, but do some homework to make sure the charity is reputable. Charities have a varying degree of “overhead” which is what they take out of your donation for salaries and other expenses. They also have varying degrees of oversight and accountability.
The question for your budget is how much do you want to give, and how often (monthly, annually), based on a percentage of your income or a fixed amount?
Is My Charitable Contribution Tax Deductible?
Many people choose to donate without knowing or even caring about the tax benefits. However tax benefits are available in certain scenarios. Like any kind of tax loophole they are complex and require understanding the rules and keeping records.
In short, if you are making a small contribution, don’t worry about the tax implications. For big donations it may be worth your while to do some checking to see if a tax benefit can be tied in.
One of the biggest impediments to individuals enjoying the tax benefits of charitable contributions is the IRS requires you to itemize deductions. Oftentimes small donations do not add up enough to justify itemizing deductions.
On the business side it is similar, charitable contributions are not considered a Schedule C expense. For example, one family operated business decided to make a cash donation of $10,000 to a local fundraiser. Unfortunately, because cash donations are considered a personal expense, their donation was not a tax write off. Had the charity been selling advertising space that the business purchased for $10,000 and there was justification for that amount then they would have been able to write off the "donation".
Ensure the Organization Is Qualified
Each charity and nonprofit are classified according to their mission and organizational structure and must register with the IRS. These nonprofits are typically classified as 501(c)(3) and can receive tax-deductible donations. However, not every nonprofit is classified as a 501(c)(3). Many are classified as 501(c)(4) - Social Welfare Organizations. Donations to most 501(c)(4)s do not qualify for tax-deductible donations, but there are exceptions. The best way to learn if the organization you are donating to is a qualified charity is to use the IRS Exempt Organizations Select Check tool.
Your Political Donation Will Not Qualify
If you’re especially patriotic or politically motivated, you may decide to make donations to a politician’s campaign or a political party. If you donate money to a candidate or committee, advertising for a candidate or party, or to campaign fund-raising events, your donation will not qualify as a charitable deduction or a miscellaneous deduction.
Document Your Cash Donations
If you want to donate cash to a local or national organization, you might be inclined to make one-off donations occasionally. These donations might include the collection plate at church or a small donation to a local organization. When you add up your small cash contributions at the end of the year, you’ll need documentation of your donation to write them off. This documentation might include receipts, a bank statement, or a credit card statement.
If your cash donation is worth more than $250, the IRS requires you to have a written letter of acknowledgment from the charity. The letter would need to include the amount you donated if you received anything in exchange for your donation, and the value of anything you received in exchange for your donation.
You can only claim what you donated in the applicable tax year. For example, if you pledge to donate $10 per month beginning in July for one year, you can’t write off $120 on your taxes. Instead, you can write off $60 this year, and $60 next year.
Gifts Might Be Tax-Deductible
The IRS says that charitable contributions are gifts given without anything in return. If you do get something in return (like a ticket to an event, a meal, a coffee mug) then the fair market value of the thing you got is subtracted from the donation amount. For example, if you purchased a dinner at a charitable event for $100, but the dinner was worth $30, you can write off the $70 difference. As usual with taxes, it is important to keep all your receipts when making deductions.
The Bottom Line
People donate to charity for various reasons. Many people include charitable giving in their budget each month. To make your budget stretch further be sure to consult with a tax professional before making large donations so you can tap into the deduction.
For more reading:
- How to Check Out a Charity Before You Donate
- GoFundMe’s list of the 30 best charities to donate to
- Small Business Expenses: Advertising vs. Charity (Purple Pig Purchases)
- Charitable Contributions You Think You Can Claim but Can't
- Small Business Guide to Deducting Charitable Donations
- IRS Publication 526 (2019), Charitable Contributions - long and very detailed!