Tuesday, January 09, 2007

Picking the best time and manner for charitable donations

I was visiting one of my favourite blogs, My Personal Finance Blog, and read a recent post discussing last minute (before end of year) charitable donations. You can read it here.

MPFB made a point of removing clutter after a recent move and taking advantage of tax deductions before end of year. A very good move. We'd been working on a similar strategy since the beginning of September. Why September - we have more crap! Also, I wanted the time to research current market prices for what we were donating.

Valuing your donation

Most accountants will take a very strict assessment of the value of what you donate. Often 25% or even less. However, somethings, such as promotional products, etc... might be brand new - or antiques - these items have value greater than 25%.

Our approach was to research on the internet what similar used (or new and discounted) products were selling for and document the price. It took alot more time, but I'd like to think it saved us $12,000 in deductions - which comes to another $5,000 to $6,000 in our situation.

If you want to short-cut the process, you could use e-bay or intuit's It's Deductible. Frankly, I don't trust or believe in either process, but they are credible. Why? e-Bay often represents the bottom price (not the average market price) for many items - especially non-collectibles. It's Deductible uses e-Bay's auction history to set values. Quite frankly an expensive almost never worn designer suit really isn't worth $20 - it's worth alot more, if you care to reseach the price on the open market.

When to give cash - when to give materials -> Give Both!

First I've always found giving a bit of cash or coordinating a cash fund raiser for a charity - a worth one, that is - really makes a difference when giving material donations. If they recognize you as a cash contributor, they often treat you better, prioritize documenting your contributions, will put in extra detail if necessary and will sometimes accept contributions that they wouldn't normally take (foodbanks never advertise for office supplies or old computer equipment - if you go to the drop off window some people turn them away - but if you talk with the director - they need them desparately).

If the charity runs a thrift store and recognizes you as a significant contributor you might get early dibs on some things you really like.

How much to give

If you're giving materials of small value, individually, you might want to consider limiting your donation to less than $5,000 worth of possessions and spread the remainder to other needy organizations. If you donate $5,000 or more you might be required to have the donated property assessed in value. This could be very expensive and time consuming the subject of your donation is 500 different items worth $10 each.

If you are donating very expensive items, you certainly should have them appraised - it would be very dificult to do so after donating them. And such a donation is as much an investment in tax deductions as charity - you owe it to yourself to protect yourself from IRS scrutiny.

Where to give

I always try to give as much as possible to local charity's that run thrifts for members of the local community. They seem to give back the most and are seldom burdened with cost inefficiencies.

A novel way to give cash - donating appreciated investments

I've always ignored the recommendations to donate appreciated assets -- I usually dismissed it as something appropriate for retirees. But then I started thinking about it. By liquidating our insurance investments and putting excess cash into ETFs, we've built a non-retirement brokerage account up to more than $100k! Yeah! What would happen if I donated some of my appreciated investments - instead of giving cash?

I would donate the same amount of ETFs or mutual funds as I sought to give in cash - yet I wouldn't have to pay tax on the capital gains (long or short term). I could use the cash I was initially planning to donate to buy more of the asset and replace it in my portfolio. The only challenge here - and this is an understanding of process - is learning how to get the shares out of my account and into the hands of the charity. I'll write more about this after I've tried it. Transaction costs could make this difficult or prohibitive for smaller donations.

Document what you give

I create a spreadsheet listing all items donated, their condition and value. Also, I link to any internet site that validates the market value I place on the speadsheet. I also take digital pictures of the collected items to demonstrate their condition and prove they exist.

Finally, I make sure the charity gives me a printed receipt that summarizes what I've given.

Well, we might spend a good portion of today making more charitable donations - it's a new year and I can start donating to all the charities I maxed out last year.



Anonymous said...

We had our most unusual charitable contribution ever this year: We had to fell two large oak trees which were on a steep hillside close to our house. A retired man came from a local community action group, cut and split about 80% of the wood (over 20 cords) and hauled it away to be used for needy families. Our three oldest kids helped him by running the splitter, which gave them a chance to be useful to both the family and to others. This saved us thousands of dollars - and we were given a receipt for a charitable donation worth $2800! I almost feel guilty using it.

makingourway said...

I certainly would not feel guilty at all about helping families with fire wood. Maybe the wood will save their heating bills or even allow them to have heat. You've done a very good deed.

Take the deduction, you've saved yourself and other tax payers welfare payments (or other indirect costs), such as medicine for sick children, etc....