Should You Make Charity Contributions While in Debt?

Most households have some form of debt.   Most households give money to charity.   There is some overlap between those groups so there are households that have debts and give money to charity.   46% of households carry a credit card debt according to the Survey of Consumer Finances (either 2004 or 2007).   In 2004 the Center for Philantrhopy found that 68% of households give at least $25 to charity.   If you overlap those two figures then at least as of 2004 about 14% of households carry credit card balances and give money to charity.

Does it make sense to give money to charity while you have a credit card debt?

If you pay interest on your credit card then that is lost money.  When you make charity contributions at the same time you're almost financing your charity giving with your credit card debts.  You could generate more money for the charity by paying off your credit card debts sooner.   Not having to pay the high credit card interest will free up more of your finances which you could then redirect back to your charities.

Lets look at an example:

Lets say you've got a $5000 balance on your credit card at 19% and you make just the $100 monthly minimum payment.   You also give $100 combined to your favorite charities.   Your income is about $60,000 and you are married.   That puts you in the 15% tax bracket.

$100 to credit card and $100 to charity
It will take you 99 months to pay off your credit card at $100 a month.  At the end of the 99 months you would have given your charities $9,900 and gotten $1,485 in lower taxes.

$200 to credit card till its paid off then $200 to charity afterwards
If you pay $200 to your credit card every month then it will be paid off in 32 months.   Then after that you can put your $200 a month into your charities.  After 99 months your charities would get $13,400 total and you'd have $2,010 in lower taxes.

If you pay off your credit card first then your charities will get $3,500 more and you'll save an extra $525 in income taxes.

For you to get the tax break you have to itemize of course.   But even without that paying off the credit card first would still net the charity more in the long run.

Does the Charity need the money now?

Its possible that the charities you give money to would really use / need the money today.   They might prefer to have $100 today than $150 a couple years from now.  I don't really know how most charities look at cash flows and how important having money now is versus having more money later.   If you are worried about the impact on your charities of choice then you might contact them and see if they have a preference.   Send them an email or make a quick phone call.   This is something for the charities in question to answer.  Personally I'd assume that most very large charities would just as soon have more money in the future than less money today as they have large endowments.   Some smaller charities may have more cash flow difficulties and might prefer the money today so they can pay bills and get things accomplished today instead of tomorrow.

Bottom line:  If you have credit card debt and simultaneously make charitable donations then consider paying off your high interest credit cards today so you'll have more money to share with your charities tomorrow.

Checking out Charities

When you give money to a charity it is a good idea to make sure that the money is being used well. CharityNavigator.org and GuideStar.org are two sites that give you financial information on charities.

CharityNavigator

I find Charity Navigator easy to navigate and their information is pretty straight forward. However they don't seem to have that many charities. Charity Navigator gives a star rating to grade the charity based on their financials. Plus they also show you what % of the charity's expenses go to fundraising. A low star rating and a high % of money going to fundraising is not a very effective charity. It can help you avoid charities that seem to do nothing but spend money on fundraising like Disabled Veterans Associations which spends 94.6% of their money on fundraising and 1% on their executive's pay. A local TV station in Ohio looked into Disabled Veterans Associations with this report. Its easy to find charities on Charity Navigator. You can search by region, star rating and cause.

GuideStar

Guidestar has the full form 990 which the charity has to file with the government but you do have to register on the Guidestar site (free) to view the forms. Guidestar is harder to navigate and there isn't much there except the 990 forms. The 990 form details what the income and expenses are for the charity. The information includes specifics on where money they get comes from and what they are spending money on. Digging into the details on the 990's can give pretty interesting detail. For example you can find out from its 990 that the Goodwill in Oregon pays their CEO over $400k in 2007 and that they have half a dozen other executives making over $100k. By comparison the 990 for the Southern California Goodwill shows that they paid their President/COO a bit over $300k.

If you want a quick and easy picture of a charities finances then Charity Navigator is a good choice. If you want details on charities spending and income then Guidestar has the full 990 forms.

Is a charity credit card a good idea? Nope.

Charity credit cards or 'Affinity' cards are credit cards that have benefits for a charity or organization. Are they a good deal for you and the charity?

I think giving to charity is great and I would definitely encourage people to do so. But before you sign up for a charity / affinity credit card you should figure out how much exactly the charity is getting and determine if there's other better alternatives.

I recently ran across a reference to the Working Assets credit card. They give 10¢ to charity for every transaction you make. Plus they have rewards option for the card user. On first glance this looks like a good deal for both the charities and the card holder. But if I look a little deeper it isn't that good. The 10¢ per transaction seems nice, but the average credit card transaction is over $100 so that's 0.1% for the charity on average. The rewards program is defined in the fine print and it isn't that great either, they offer $100 gift card for 12,000 points or an airline ticket for 25,000 points. The $100 gift card is only 0.8% return and the airline ticket deal is no better than any typical airmiles card. Overall the working assets card is netting less than 1% rewards between the charity and user rewards points. They also advertise a free companion airline ticket when you sign up for the working assets card. But in the fine print they say its only offered via a specific travel organization and I couldn't find any information on the cost of the tickets. I'm doubtful that companion ticket is a good deal considering.

Looking at a few other cards that give to charity:

Target RedCard gives up to 1% of purchases to local schools. Note the 'up to' bit there. They pay 1% of purchases made at Target but only 1/2% of purchases made elsewhere. Target also gives you a 10% off if you accumulate 1000 points there. This alone might be a decent deal if you shop at Target a fair amount but it really depends on your shopping habits. Looking at my spending habits I don't see a single store that would benefit me with this kind of reward.

Ducks Unlimited WorldPoints Visa card uses the same Worldpoints rewards of the Working Assets card and they say they contribute a 'portion' of the purchases to Ducks Unlimited. I can't find any reference in the small print saying how much of a portion it is. The Consumer Reports article on the topic said its 0.25%.

Make-A-Wish Platinum card from Bank of America gives 0.65% from every purchase to the Make-A-Wish foundation.

World Wildlife Fund card gives 1% of your purchases to the WWF.

The charity cards out there don't seem to give more than 1% maximum to the charity. On the other hand its pretty easy to find cash rewards cards that will net you over 1% cash back. The American Express TrueEarnings card I have now gives 3% back on restaurants and gas, 2% on travel and 1% on other purchases. My Citibank dividend card gives 2% on gas, groceries, drugstores, utility bills and 1% on all other purchases. So overall these cards will net you 1-3% range easily with a minimum of 1%.

You're basically guaranteed to get more in cash back rewards with a good rewards card than you would be able to give to charity via a charity card.

So why not get a cash back reward, use it to accumulate cash rewards from your purchases and then donate that reward to charity? You'll : 1) net the charity more, 2) you'll have the freedom to chose the credit card you want, and 3) you'll be able to deduct the charity contribution from your taxes. Both you and your favorite charity will come out ahead if you use a good cash rewards card to get money for your charity instead of a dedicated charity credit card.


Also see the Consumer Reports article : Give While You Spend

Give stock to charity and save money on taxes.

The idea for this topic was prompted by reading the article 'My Tax Mess' on Free Money Finance discussing his tax issue. FMF donated some mutual fund shares to a charity last year.

If you have an asset like a stock or mutual fund that has increased in value then it may save you some extra tax dollars to donate that asset to a charity instead of giving the charity cash.

Lets look at an example. Lets say you routinely give $1000 a year to your favorite charity and you have some Exxon stock that you bought a few years ago that you're planning to sell this year. Lets also assume your federal marginal tax rate is 28%.

Giving cash: If you give your charity a cash gift then you'd give them $1000 and deduct that from your taxes and save $280 on your tax bill. When you sell that Exxon stock you end up paying capital gains taxes. You bought 50 shares of the stock in 2003 when it was trading for $35 a share and not its going for $94 now. So if you sell your 50 shares you'll get $4700 and owe capital gains on $2950 of that. Your capital gains tax bill will be $443. Between the donation and your stock sale, your charity gets $1000 and you walk away with $3537.

Giving Stock: If on the other hand you gifted the Exxon stock directly to the charity you can avoid that capital gains tax bill AND still benefit from an income tax deduction from the gift. Lets say you gift 11 shares of your stock straight to the charity thats a gift value of $1045. That leaves you with 39 shares of stock you sell for $3705. Your capital gains bill on that is $210. So if you gift stock your end result in this example is the charity gets $1045 and you walk away with $3787 after taxes.

United Way's website has a calculator that shows side by side comparisons of gifting stock versus cash if you want to play around with other examples.


Of course this only works if you owe taxes on the stock. If you had instead bought Washington Mutual in 2003 instead of Exxon you would have about $28 /share loss for that stock. Gifting your WAMU to your charity would potentially hurt your tax situation cause if you sell that stock you could write off the loss.


So in summary if you have stock you're looking at selling and give money to charity then you should consider the option of gifting the stock to the charity outright.