Researchers have found that the old adage "it's better to give than to receive" is correct: the benefits you get from giving to charity puts a bigger smile on your face than buying things for yourself.
As the end of the financial tax year loom, from an accounting perspective, giving also has another benefit - tax credits. Changes in the Income Tax Act a number of years ago also means that your charitable giving gets rewarded by the IRD too.
Any donation you make over $5 is eligible for a tax credit of 33.33% - a nice way to say thanks for your generosity and offset the income tax you paid to earn this money in the first place (capped at one-third of your total taxable annual income).
Working with a number of donors at The Gift Trust, I’ve had a number of conversations about the tax implications of giving. There are a few common themes, and things to ponder next time you open your wallet to spread some happiness.
“I don’t give to receive a tax credit - I give to support the charity I care about”
Fabulous! The majority of us give because we want to support the causes closest to our heart – be it health, providing education, supporting the arts, or more.
But, could thinking about the tax credit you are entitled to allow you to be even more generous, bring more happiness and make more impact? Could you gift 50% more each year, at no extra cost?
Here’s an example:
Each year Jane gifts $20 a week to her local hospice, totalling $1,000 per year. She wants to help support the great work of the hospice after her father received great care there in his final months of life. Getting a donation tax credit has never factored into her giving and she has never bothered to claim the tax credit back.
If she did factor in her tax credit, she could increase the amount she donates $30 a week ($1,500 a year). At the end of the financial year she would be entitled to a tax credit of $500, which keeps her net donation at the same level ($1,000) as when she wasn’t claiming her tax credit. And, the hospice will get 50% more funds from her each year.
“It’s just too much of a hassle to collect up my donation receipts. It’s not worth the energy and the cost to get my accountant to process this for me…”
If you nod your head to this statement, you are in the same boat as about 74% of the rest of the New Zealand public who made donations but didn’t claim back their tax credit.
74% of New Zealand public who made donations, didn’t claim back their tax credit.
While Kiwis are generous (as individuals we gave $1.53 billion in 2014), we are not great at doing our paperwork. This means there is more than $383 million sitting at the IRD that could either go back in our wallets, or be used as a boost for our favourite charities.
One of The Gift Trust donors gifted around $3,500 a year to various charities. Before starting a Gift Account she never claimed a tax credit as collating all her donation receipts and getting them to her accountant each year felt too overwhelming. Add the cost of getting the accountant to process this, and she felt the return would be limited.
She now makes a monthly contribution to her Gift Account with The Gift Trust. At Christmas time each year, she makes a number of donations to the causes she wants to support.
Because all her giving is via her Gift Account, she receives just one tax receipt per year for all her gifts. She can send this one receipt direct to her accountant, or on to the IRD to make her tax credit claim. She elects to get this tax credit returned to her Gift Account and can now gift over $5,000 per year.
“I’d rather just give my cause some products to help them out.”
If you gift a charity products you have purchased, you can’t claim a tax credit. If you gave them a cash donation to help buy the same products, they could purchase $172.50 worth of supplies.
John could buy $20 of food at his supermarket each week and put this in the local Foodbank's charity collection box. But when John donates physical gifts, he can’t claim a charitable donation credit. If John had gifted them cash instead to buying these goods, he could have even more impact.
How? If you were willing to buy goods of $100 to donate, you could have instead donated $150 in cash (you would have received a $50 tax credit from the IRD on this donation and still spent the same $100). The Foodbank could then purchase supplies worth $172.50, by claiming back the 15% GST on these groceries too, while spending the $150 you donated. By donating cash instead of goods, your $100 has resulted in a return of 72.5% for your selected charity.
“I’m not sure what I can claim tax credits on?”
You can claim tax credits for donations that are unconditional gifts – gifts which don’t entitle you to receive anything in return. This can include:
- regular or one-off donations to registered charities
- donations to your church
- voluntary school fees (but not school activity fees).
You can also claim for donations made up to three years ago. If you made a donation and forgot to claim that year, it’s not too late – as long as it was no more than three years ago, you have the receipt, you earned a taxable income and were a NZ tax resident in the year you are claiming for.
You can’t claim for conditional gifts like:
- charity event tickets
- charity auction purchases
- donated goods
- school activity fees e.g school camp fees
- donations to political parties.
If you are looking for a way to add more happiness to your life, simplify your giving, and get a nice tax credit lump to end the financial year – either for yourself or to have even more impact – donor advised gift accounts with The Gift Trust might be an option to consider. Contact us to talk more.