When Donating a Dollar Only Costs Five Cents

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2018 Tax Law Changes

The rules on state tax credits have been updated. Read “State Tax Credits Are Becoming Less Valuable” for more information.

According to a poll published last month by Fidelity Investments, Americans are likely to give the same amount or less to charity in 2010. But Virginians are fortunate to have a reason to donate 23 times more to charity this year.

Virginia offers tax credits in exchange for donations to nonprofit organizations serving the truly needy. More than 200 charities have been designated Neighborhood Assistance Programs (NAPs).

Donors to these approved charities are eligible to receive a Virginia tax credit for 40% of the value of their total contribution. Thus a gift of $1,000 to a NAP qualifies for a $400 Virginia tax credit. For some taxpayers, a donation to a NAP may yield total federal and state tax savings worth nearly 96 cents for every dollar they give away.

NAPs provide health care, education, housing, job training and food to the poorest people in our communities. Included in the list are large organizations such as the Virginia chapters of Habitat for Humanity, Boys & Girls Clubs, and The Salvation Army, as well as smaller ones like the Soho Center for Arts and Education.

To be eligible for the 40% Virginia credit, individuals must contribute a minimum of $500. A $500 gift to a NAP is eligible for a $200 Virginia tax credit. Donors may give cash or marketable securities. Gifts of merchandise, services or real estate are not eligible.

Remember that a tax credit is far more valuable than a deduction because it reduces your total tax bill dollar for dollar.

Businesses are also encouraged to donate. They can receive tax credits for professional services donated to an eligible charity as well as for real estate, materials, cash and stock donations. Businesses must donate $1,000 or more to be eligible for the 40% credit. They cannot receive more than $175,000 in tax credits per year.

The beauty of the Neighborhood Assistance Program is that it allows Virginians to give even more generously to help their communities. Virginians in the top federal tax bracket can donate $1,000 to a NAP and receive the equivalent of $957.50 in total federal and state tax savings. With such significant tax savings, people can give 10 or 20 times more than they had planned.

Let’s assume Mr. Monopoly has a share of highly appreciated stock worth $1,000. Instead of selling the stock and paying the capital gains tax, he decides to give the stock directly to charity. By transferring the stock to a NAP, Mr. Monopoly avoids federal capital gains taxes of $150. He can take a deduction of $1,000 against his income, saving him $350 on his federal income taxes. Thus far his tax savings are $500, but they don’t stop there. On his state return, Mr. Monopoly’s gift yields savings of $57.50. Plus he received a $400 tax credit from the NAP. In all, Mr. Monopoly receives a total of $957.50 in tax savings. What began as a $1,000 stock gift actually cost him only $42.50.

The big tax savings allow donors to give more to charity. Instead of donating a stock worth $1,000, Mr. Monopoly could consider giving stock valued at $23,529, a donation worth more than 23 times his original gift. Assuming the stock had a low cost basis, the real personal cost of such a gift would be closer to his original gift amount of $1,000.

Even if you are in a lower federal tax bracket, your tax savings may still be significant. For many middle-class Virginians, the total tax savings generated through a gift to a NAP is likely to be worth 60% of the gift amount.

To receive tax credits for your donation, first contact the charitable organization and determine if it has any remaining tax credits to allocate to your gift. If tax credits are still available, fill out the Contribution Notification Form and send it to the organization. The charity will orchestrate the transfer of the tax credits to you. After submitting the paperwork, you will receive a tax credit certificate. At tax time, attach the certificate to your return.

The Department of Social Services and the Department of Education manage the transfer of the credits. Each qualifying charity is assigned a set number of credits annually. Your donation might not receive a credit if the charity has already given away its share. But if you receive more tax credits than you need this year, you can carry them forward to future years.

If you want to make charitable donations to a NAP, don’t wait until the end of the year. Applying for the tax credits does require some extra effort. Your gift and the corresponding paperwork must be complete by year-end to receive the credit for 2010.

Links to the charities that qualify as NAPs are available on our website. Give generously this year to help Virginians in need. The dollars you donate will only cost you pennies.

As part of the nonprofit NAPFA Consumer Education Foundation, we are offering a presentation titled “Philanthropy Isn’t Just for the Rich” at the Charlottesville Northside Library at 300 Albemarle Square on Wendesday, November 10, from 7:00 to 8:00 p.m. with a question-and-answer session to follow. The talk is free and open to the public.

Photo by Saffu on Unsplash

Follow Beth Nedelisky:

Wealth Manager, CFA, CFP®

Beth Nedelisky is part of the Investment Committee at Marotta Wealth Management and specializes in trust and endowment management. Born in Africa, raised in Europe and married in the USA, Beth understands world markets first hand.

Follow David John Marotta:

President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.