Giving To Charities - Tax Deductions and Such
By: Richard A. Chapo

The tax code in the United States contains many provisions to promote certain behavior. One area of behavior is the promotion of giving to qualified charities.

In the rush to get tax returns prepared and filed, many people absentmindedly forget to include deductions for contributions to charities. If you itemize deductions on your tax return, this can be an expensive omission.

Pursuant to relevant provisions of the tax code, you can take significant deductions if you donate money or goods to a qualified charity. A qualified charity is one that is registered with the IRS as a 501c3 entity. The 501 designation refers to the relevant section of the tax code.

Importantly, not all charitable organizations are qualified with the IRS. You can go to the IRS web site and search through a list to see if a particular group is included. If they are not, red flags should go be raised.

Before claiming your deduction for donations, there are a couple of things to keep in mind:

UK Charities and Tax Legislation

Tax changes in April 2000 turned the cumbersome charity tax regime upside down, and some recent fine-tuning has tweaked it further. Any charity registered with the Charity Commission (look for "registered charity" on its literature) or organisations like Schools, Hospitals and Churches that automatically have charitable status can take advantage of schemes allowing them to reclaim your tax.

Gift Aid
The simplest way to give is via "gift aid". This allows charities to claim back your tax from the Inland Revenue on both one-off and regular donations. There's no minimum contribution so even on the smallest donations the tax is reclaimable.

All the charity needs is your name, address and a declaration that you're a UK taxpayer. It can even be done over the phone or face to face as written proof is not required.

Charities reclaim the tax at the basic rate, which means they get around 28% more than you donate (e.g. you give £50, the charity gets £64.10).

Those people paying tax at the higher 40% rate are able to reclaim the extra 18% tax they've paid for themselves on top of this, so on £50 that's another £11.50. However, the tax self-assessment form does also include a note of charity gifts so higher rate taxpayers can choose to donate this extra tax to charity too.

Payroll Giving
Another easy solution is to give via "payroll giving" where you donate a regular amount which is taken direct from your salary, through your employer's payroll. As the donation is given before any tax is taken off, the charity automatically receives all the tax on both basic rate taxpayers and higher rate taxpayers.

The only problem is that employers must have a scheme in place as you can't do it on your own. If your firm doesn't run a scheme, suggest they try it. It is a simple process run through the automated payroll. Self-employed sole traders cannot use this scheme.

If you work for a 'Small to Medium Enterprize (SME) - a company with less than 500 employees, there's a way to get more cash. If it sets up payroll giving between April 2004 and December 2006, then the Government will match the first £10 of your total donations made before March 2007, when you begin donating.

Better still, if your company doesn't offer payroll giving, it's easy to persuade it as any SME setting it up before December 2006 will qualify for a grant of up to £500 for doing so!

For more information on these schemes visit http://www.hmrc.gov.uk/families/iwtmake-a-donation-to-charity.shtml

Charities Aid foundation
To make tax efficient donating even easier, The Charities Aid foundation runs a special Charity Account. You pay money in directly through either Gift Aid or Payroll giving and it automatically collects the tax and adds it to your account.

After this you can use its special card or cheque book to donate from this account to a charity of your choice. The big advantage here is you can donate on impulse - you can even put these special cheques in collection tins to enable the charity to gain the maximum amount.

Tax breaks can make a significant difference to the value of donations. Using gift aid, a basic rate taxpayer would only need to give £15.60 and a higher rate taxpayer just £12, assuming the extra tax is also donated to the charity, for £20 to be received by a charity.

Donating Shares
Donating shares to charity is a less well known way of giving to charity but there can be substantial tax benefits here. When you sign over shares to charity there's no capital gains tax and you can offset their value on the day of transfer against your income tax liability.

This option can also be useful if you have a shareholding too small to be worth selling, particularly when taking into consideration brokers' costs on selling. It can also be an effective way to give to charity if you've used up your capital gains tax limit (£7,900 in 2006 for example), as you won't incur capital gains tax and the income tax write off reduces your tax bill as well.

The transfer form acts as a record of the transfer and the charity can wait until it builds up a bigger portfolio to cut down broking costs. For more details on donating shares to charity see http://www.hmrc.gov.uk/pdfs/ir178.htm