Charity Donations: When Your Money Goes to the Wrong Hands

April 8, 2015

Losing moneyAmericans are giving people. Whether it’s a catastrophe in Haiti or a disaster in Japan, America is usually the first country to reach out and help.

Charities based in the U.S. need money to continue their mission. That goes without saying. But what charities are worth giving it? Is there a benchmark that can help compare the efficiency with which charities operate? Is there someway to put a specific charity on a continuum from “Support These Charities” to “Don’t Waste Your Time?”

Yes, but…

Which Charity?

When you reach into the pocket to give, you want to believe you are donating to a worthy cause. If you try to get direction from the professional philanthropy advisers, they won’t have much to say. They’ll guide you with infographics on their website and lead you to an array of charitable options. But their standard assumption is that they shouldn’t make objective judgments about which charities are worth supporting and the ones a donor should flee.

One example is the Rockefeller Philanthropy Advisors, one of the globe’s largest philanthropic service groups. Their website makes a downloadable pamphlet available which shows the various areas a donor may be interested in knowing. Then, the site asks the important question — and answers itself by saying, “There’s obviously no object answer to that question.”

Four Reasons Not to Donate and an Alternative

James Altucher, a financial writer, lists reasons on why he would never donate to a major charity. His reasons may be valid for others to consider.

  1. Government. Altucher points out that a large portion of the US budget already goes towards funding philanthropic causes. Once we pay our taxes, we have lost control over where that money goes and no one to determine if the money is going towards a worthy charity.
  2. Administrative Overhead. Altucher points out that for every dollar donated to the American Cancer Society, 9.8 cents goes to administrative costs. Altucher continues to say that ACS is probably one of the better run charities, but he still doesn’t like any of his donation going to cover mere admin costs.
  3. Marketing. Using ACS again, Altucher says that 21.8 cents of every dollar goes to marketing. Combined with the admin costs, about 70 percent is left to go towards the purpose for which he donated in the first place.
  4. Charities are Businesses. Businesses have agendas and that agenda is to make money so, wait for it, they can make more money.

Altucher does suggest a method that can better help more people directly.  Create a “micro-charity.”  Pick a local cause which needs money NOW and give. A small amount of cash can immediately make a large difference in someone’s life.

Car Donations

“Donate your car and support charity.” The television ads are ubiquitous. Have a charity in mind? Donate that clunker and let them sell it. Sounds good, right?  Not so fast.

Depending on your situation, you could be better off selling the car yourself and then donating the cash. You get a bigger tax write-off and the charity gets more money.

If you donate the car directly to the charity, then you qualify — tax-wise — for a fraction of what the charity will sell the vehicle for. That fraction is called the Marginal Tax Rate and is roughly 25 percent. If you donate the car to charity and they sell it at auction for $4000, your tax benefit is $1,000.

If you sell your car outright, you get 100 percent of the sale price and that will be more than the donation’s tax benefit, even if the offer is lower than what your vehicle would sell for at auction.