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If it hasn't already happened, it will soon: Before year end, you can expect to get plenty of requests for donations from your favorite charitable organizations. And with continuing nervousness about the future prospects for the U.S. economy, charities will likely remain more vigilant than ever in trying to make their own ends meet.
If you play your cards right, though, you can both help out the charities of your choice as well as get a big break for yourself. Later in this article, I'll reveal some smart moves for your charitable contributions. But first, let's take a look at the challenging situation that charities are facing right now.
Hard times for everyone
The tough economic environment is squeezing charities from both ends. On one hand, more people than ever need the services that charities provide. In GuideStar's latest nonprofit fundraising study from this fall, 65% of charities reported increased demand for their services in 2011.
On the other hand, charities have fewer resources than ever to provide those services. Huge charities like Microsoft (Nasdaq: MSFT ) co-founder Bill Gates' foundation don't have to worry about having enough money. But only 41% of charities in the survey said their donations had risen. And while the majority of nonprofits expect contribution levels toward the end of 2011 to be higher than they were last year, nearly 1 in 12 charities are in danger of closing their doors for financial reasons -- many of them are smaller organizations that serve vital niches in local communities.
How you can help (yourself)
Many people rely on charitable giving. But from your perspective as a donor, you want to make sure your gift not only goes toward good causes but also cuts your tax bill as much as it can.
The easiest way to donate is to write a check. If you itemize deductions, you can then write off the donation, which can give you as much as 35% back through lower taxes.
But if you've been fortunate enough to own stocks that have gone up substantially in value, you can get even more bang for your donation buck. By giving away those shares, you not only get to deduct their full value -- you also get to avoid paying the capital gains taxes you'd owe if you sold the shares.
Just as an example, let's take a look at some of the biggest winners of the past year and compare the two ways you could take advantage of those gains to make gifts to charity:
Tax Savings if Give 100 Shares
Tax Savings if Sell 100 Shares and Give After-Tax Cash
|Pharmasset (Nasdaq: VRUS )||447.1%||$4,479||$3,930|
|Inhibitex (Nasdaq: INHX )||386.1%||$492||$433|
|Silicon Motion (Nasdaq: SIMO )||368.9%||$660||$582|
|Majesco Entertainment (Nasdaq: COOL )||323.1%||$102||$90|
|Midway Gold (AMEX: MDW )||186.9%||$84||$76|
|Conn's (Nasdaq: CONN )||173.8%||$411||$372|
Source: Motley Fool CAPS. Assumes 35% deduction for charitable contributions and 15% in long-term capital gains tax saved.
As you can see, there's a pretty substantial drop in your tax savings if you sell and give cash rather than give shares directly. Moreover, in the above situation, your charity gets a lot less from the cash donation than it would from the shares -- because it can sell shares tax-free, even though you had a gain on them.
The key, though, is that you have to have owned your shares for longer than a year. If you give shares with short-term gains, you only get to deduct what you paid for them -- which in these situations would be much less than they're currently worth.
Think about your IRA
Another choice if you're 70 1/2 or older is to use your IRA to make charitable gifts. You won't get a deduction, but you do avoid paying the normal tax on your IRA distribution.
That can be especially useful for non-itemizers as well as those seeking to make required minimum distributions from their retirement accounts. But the provision expires at the end of 2011, so don't wait to move forward.
Do whatever you can
In tough times, charities need your help more than ever. If you can afford to make a financial contribution this year, consider using one of the strategies above to make it go as far as it can.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.