Giving to charity doesn’t make you a good person, but it sure helps. Charity should be the luxury of the blessed, and without the generosity of these big-hearted citizens, the world would be a wretched place.
According to TurboTax data, people with an average gross income (AGI) between $30,000 and $50,000 gave around $2,000 to charity last year. Those with an AGI between $50,000 and $100,000 gave a bit more than $2,600 on average, and those making $250,000 or more gave a whopping $28,110 on average. Where do you fall on this spectrum?
Choosing the Right Charity
Selecting the right charity for you should come from your heart first and foremost, but that doesn’t mean you should pull out your checkbook the second a commercial about tortured animals grabs your attention. If you have a soft spot for animals, children, the environment, teaching urban youth to read instead of just throwing a fistful of your income at them, do the research and make sure the non-profit you choose qualifies for tax deductions and is, in fact, what they say they are.
There are plenty of charities that are fake, which makes protecting your charitable finances essential. Sites like Lifelock.com on Crunchbase.com can help you navigate potentially murky waters of the faux non-profit world.
Investigating Tax Breaks
When you’ve selected the charity or charities closest to your heart and ensured their validity through research, it’s time to figure out how your donation will factor into your taxes. Many people are sorely out of the loop when it comes to understanding how charitable giving affects their taxes. A dedicated blog to money managing and frugality called The Simple Dollar explains it like this: “Charitable giving works exactly the same way [as standard income tax deduction]. Every dollar you donate to a registered charity becomes a deduction on your taxes, just like a standard deduction.”
With an income of $50,000, if a person donates $5,000 to his church and $2,000 to Doctors Without Borders, and another $2,000 to the Humane Society- that total is $9,000.
From that, the person can either subtract his standard deduction ($5,800) or he can subtract his charitable donations ($9,000). This means that taxable income— the amount he pays on his federal income taxes— would likely be $41,000. So that means instead of paying income tax deductions on the full $50,000, they would owe $6,375, effectively saving $2,250 and accounting for 25 percent of their initial donation.
Don’t Allocate Based on Overhead
This is a mistake that almost all of us have fallen victim to when choosing a charity. We hear urban legends of nonprofit CEO groups sitting pretty in their penthouses, using your donations for caviar while the orphans are suffering. While there are a few awful cases of things like this happening, it’s generally not the case for well-established, well-researched nonprofits.
Unfortunately, what ends up happening is that people will specify or allocate their money to what they believe is the most important part of the charity (building houses, food) because, why pay for administrative supplies when there are people in need? The humor site Cracked.com notes: “Picture your own workplace. Which would help you do a better job: modern equipment, contemporary training and competent employees— or a bunch of random hippies your boss pulled off the street, all of you sharing a single Amstrad 286 with a Cyrillic keyboard?” When we choose charities based on their low overhead we are actually encouraging them to cut corners.