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Personal Finance

How and Why to Donate to Charity (Even If You Don't Get a Tax Benefit)

Budgeting for donations is a way to make sure you’re spending your money in ways that reflect your values and support issues that you care about.

How you spend your money reveals many things about your priorities. When you create a personal or household budget, things like saving for retirement, rent, food, and medical expenses are usually top of mind.

Once you have your necessary expenses covered, though, how will you plan to spend the remaining pool? If you prioritize travel, you may want to start saving for a big vacation. Love live sports? Then perhaps a fund for local sporting events. Do you enjoy spending time volunteering to teach elementary students how to read? Consider furthering your impact by making a monthly or semiannual donation to that organization.

Budgeting for charitable donations is a way to make sure you’re spending your money in ways that reflect your values and support issues or organizations that you care about. It’s also a way to be more mindful of your spending and “put your money where your mouth is,” so to speak.

What Is a Charitable Donation?

According to the IRS, a charitable donation is a donation given as a gift to an IRS-qualified organization that is voluntary and made without expectation of any substantial benefits in return. These organizations meet 501(c)(3) requirements to be listed as qualified organizations. Eligible organizations include religious, charitable, scientific, literary, educational, private, political, or nonprofit organizations. (You can check an organization's eligibility using this tool.) If you donate money to a school fundraiser, that also counts as a charitable donation, so save your receipt. (But remember: If you receive a benefit because of your contribution such as merchandise, tickets to a ball game, or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.) It's a good idea to save all the receipts from charitable donations you make throughout the year, because if you donate enough, it could reduce the amount of income tax you owe.

Tax Benefits for Charitable Donations

There are some tax breaks you can get for donating, but your donations must exceed a certain threshold, known as the standard deduction. Taxpayers can elect to choose the standard deduction or itemize their deductions, whichever is higher. Because the standard deduction is a high threshold, it's less likely that you'll get a tax benefit from your donations unless you're making a very substantial gift.

Lasting Effects of Donations

Even if donating your money to a worthy cause doesn't qualify you for a tax break, there are plenty of good reasons to do it anyway. People may choose to donate money to charitable organizations and other nonprofits simply because they gain satisfaction from donating. A study conducted by the Harvard Business School found that charitable behavior is linked to happiness; happier people give more, which then increases their happiness. The researchers found that donating money makes us happiest when donations are self-directed and made to a cause that truly matters to us. (Interestingly. they also found that asking people to give in order to be happy may have the opposite effect and decrease charitable giving.)

Where Do I Start?

Create a list of charitable organizations and nonprofits that you identify with and want to support. Research your potential options first to see if they are tax-exempt and then to see how impactful the allocated funds are to their cause. The IRS Tax Exempt Search Organization Tool is a great resource to start with to check tax-exemption status. Charity Watch and Charity Navigator are tools that help you evaluate the charity's spending and impact. Maybe you want to pick a different organization each month to donate the allocated portion of your budget to, or maybe you opt to make two donations in a year to the same organization. This is ultimately up to you and is a way to budget money for needs that go beyond yourself.

More Articles and Videos About Charitable Giving

The Investor's Guide to Charitable Giving in 2021 (article) Charitable Giving Strategies in 2021 (video) Are Charitable Donations Still Tax-Deductible? (article) Should Your Clump Your Charitable Donations? (video) How Charitable Giving Can Improve Your Portfolio (video)

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