In Western cultures, December is traditionally the month for gift-giving. Besides scoring a coveted Xbox for the kids and replacing Aunt Clara's fuzzy slippers, many of us make a habit of giving at year's end to those less fortunate than us and our families.
The recent natural disasters in the U.S. and abroad have brought the need for assistance closer to home and generated record levels of generosity. Uncle Sam has already responded by giving us new tax incentives to further encourage making these gifts, and more incentives may be on the way.
Uncle Sam says, "Give it away!"
After Hurricane Katrina hit the Gulf Coast on Aug. 29, Congress hurriedly passed the Katrina Emergency Tax Relief Act of 2005 (a.k.a. KETRA). While the bulk of this bill dealt with immediate tax-relief measures for those directly affected by the hurricane, there were also some short-term charitable giving incentives that benefit anyone giving to any public charity -- hurricane-related or not.
If you itemize your deductions, you normally can't deduct cash donations to public charities if those donations make up more than 50% of your income. Any excess amounts must be carried forward and deducted over the next five years. The most significant of the temporary KETRA changes (but, of course, applicable only to taxpayers who are particularly charitably inclined) allows you to deduct cash contributions to public charities up to as much as 100% of your income.
To be eligible, these donations must be made to public charities between Aug. 28 and Dec. 31, 2005. Best of all, this new deduction applies to all cash contributions made during this time frame -- not just those made to Katrina relief agencies.
In other words, all of this year's Foolish charities qualify: Doctors Without Borders, DonorsChoose, Heifer International, the Humane Society of Louisiana, and Mercy Corps, as well as any other public charity that speaks to you.
The future of charitable deductions
There has been a lot of recent press coverage on tax reform. In November, President Bush's Advisory Panel on Federal Tax Reform released its recommendations for overhauling our federal tax system. Under the president's proposed plan, all taxpayers may be able to take deductions for charitable contributions, not just the 26% of Americans who itemize their taxes.
The catch (yes, there's always a catch) is that a proposed 1% of income threshold will have to be passed before any tax benefit will be realized. What this means is that the tax benefit may be diminished under the new plan for many taxpayers who now itemize under the current tax system.
If you currently itemize and give less than 1% of your income to charity, you should make your contributions now, while current tax law is still in effect and a benefit can still be received for your 2005 contributions. A future 1% floor might mean less incentive to give for some current donors. These donors might also begin to "bunch" contributions every other year to pass the threshold level of giving.
The plan would also eliminate confusion on the valuation of property contributions in many cases. The Advisory Panel recommends that taxpayers be allowed to sell property without paying tax on any gain, provided that the full sales proceeds are donated to charity within 60 days of the sale. The charitable contribution deduction would be available to the extent the total exceeds the 1% of income threshold. This change would be appreciated by charities, too, because they would get more cash and fewer old cars, etc., which they, in turn, have to sell to realize any benefit.
More recently, the Senate took its own stab at some far-reaching new charitable deductions. Under the Senate bill, rather than using an income threshold of 1%, individuals who don't itemize their taxes could deduct contributions to non-profit organizations over a flat $210 threshold. And for couples filing a joint return, the threshold would be $420.
Another part of the Senate bill would encourage charitable giving by allowing seniors to donate money from their IRAs to charity tax-free.
At the time of publication, the Senate and House are still discussing what will be in the final package they send to the president. Stay tuned for an update on the final tax provisions.
Looking for your ROI on charitable giving?
With all these great new opportunities to send cash to charity rather than to the government, giving should be easy this holiday season, right? Not so fast.
There are 1 million registered non-profit organizations in the United States. This makes it rather difficult to narrow it down to just a few.
Smart donors are beginning to treat their charitable giving a lot like their financial investments. Think of it this way: Would you buy shares of a company based solely on the information contained in a stock ticker? I think not. Then why should you send money to a public charity without first learning a little about how it spends its funds?
And now, with Enron-style governance scandals afflicting non-profit institutions ranging from the United Way to American University, it's time to be a little more thoughtful with your giving.
For individuals contributing a few hundred dollars, or even a few thousand dollars, the process of due diligence on charitable giving doesn't need to be exhaustive or terribly time-consuming. But any donor, regardless of the size of contribution, can and should call an organization and get answers to a few basic questions before sending money.
Here are five key issues you should consider as you sit down with your checkbook to write out your holiday checks to charity.
How big is the organization you want to support, and where will your support have the greatest impact? Is it at a $100 million international organization or at a $20,000 local organization? For hurricane relief or efforts to prevent global poverty, those $100 million organizations are often better equipped to get the job done -- and they certainly need your help -- but helping a local organization with a smaller budget, where you are more likely to see the impact of your contribution, might be more valuable to you and your community.
Overhead vs. underfoot
Nonprofits divide their budgets into program expenses (what's really getting done on the ground) and overhead (all of the background work necessary to support the programs, such as fundraising and administrative expenses.) Organizations can't operate without overhead, but how much is too much? Although an overhead rate above 35% should raise serious red flags, there are no fast rules on what is appropriate. It depends on the type of organization and what it's trying to accomplish. Ask for a breakdown and an explanation.
Nonprofits deliver necessary services and are (usually) run by serious professionals. It costs money to attract good leaders. While some nonprofit executives are volunteers, others can make more than $800,000 a year, plus additional perks. How much is too much, and what are you willing to support?
Who's on board?
The best way to prevent governance problems at organizations is by having a qualified and involved board of directors. Some organizations focus more on attracting big names or Hollywood stars rather than knowledgeable experts in the field. Look at the directors list and see whether there are experts in the area of the organization's work, or just fancy names. Think about it: Who is more likely to take the time to govern how the money is being spent?
The fourth tenet of Foolanthropy couldn't have stated it better: Reaching root causes of today's problems, rather than creating short-term fixes, is the only way to create lasting improvements.
Thankfully, for those considering a contribution to a Foolish charity, a crack team of Motley Fool volunteers has already looked into many of these issues on your behalf!
The United States is the most charitable country in the world, and this year is sure to be a record breaker for contributions. Despite its faltering initial response, the federal government deserves credit for encouraging charitable contributions at a time when there are so many unmet needs, and each of you thinking about donating through Foolanthropy deserves thanks for taking steps to be more informed and effective donors.
Eric Kessler is the principal of Arabella Philanthropic Investment Advisors. Arabella donated time to help the Foolanthropy 2005 campaign expand its due diligence process. This year, he and his wife plan to support DonorsChoose and the Dystonia Medical Research Foundation.
Patty Moss is in the Personal Financial Services group of Ernst & Young in Chicago, where she advises individuals, families, and foundation managers on philanthropy and other tax matters. She has served on various non-profit boards and done volunteer work, mostly in the health-care arena.