Should I stop giving to charity and pay down debt?

By Walter Updegrave, senior editor


(Money Magazine) -- Question: I'm 60, make a good salary and I give generously to charities and other causes I support. I feel that those who have should give to those who don't. I also have about $20,000 in credit card debt, however.

Which leaves me with a dilemma: Should I continue to help others or should I stop giving and pay off my credit cards? -- Barbara M. Redlands, Calif.

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Answer: I think that, like you, most Americans believe it's important to help people who are less fortunate. And that altruistic attitude has remained largely intact despite the hard economic times we're struggling through.

Indeed, a recent Red Cross survey found that nearly 60% of those polled said it's even more important to give to charity this year because of the tough economy.

And even as they were planning to cut back their spending in other areas during this holiday season, 72% said they expect to give the same amount or more to charitable causes than last year.

That said, I don't think that remaining true to your philanthropic values means that you must jeopardize your own financial security, which is what you're likely doing by carrying a big debt load.

In fact, I'd argue that you can probably be more helpful in the long run to the causes that are important to you if you keep your personal finances in good order.

Now, does that mean you have to stop giving altogether until you repay your credit card debt? Not necessarily. You could do both, cutting back a bit on donations and using the freed-up cash to boost your credit card payments.

For example, if your credit card charges a 16% rate on your $20,000 balance and requires a 4% minimum monthly payment, clearing that debt would take you nearly 15 years and cost almost $30,000 in principal and interest, assuming you pay only the minimum (which is $800 initially).

But by boosting your payment to $1,000 a month, you would repay the balance in two years and pay less than $24,000. That's a difference of six thousand bucks.

In short, by paying off your plastic balance sooner, you can in effect transfer interest that would have gone to the credit card company to the organizations and causes you care about.

And by putting yourself on firmer financial footing, I think one could argue that you'll be in a better position to fund eleemosynary ventures in the future. (To see how long it will take to pay off your balance and how much interest you'll pay by paying other amounts, click here.

The other way you can maximize your beneficence is by taking full advantage of the tax incentives for charitable giving, starting with getting your donation in by the end of the year if you want it to reduce your 2010 tax bill.

For a rundown of what you should do to insure your contributions qualify for any available breaks, check out the IRS's list of 10 tips for deducting charitable contributions.

The IRS also provides online help, including a search engine, so you can help you determine whether an organization is an "eligible donee" for tax purposes.

And this IRS notice explains some of the limits on charitable contributions, although they typically apply only if you're making rather large donations, like 20% or more of your adjusted gross income.

You can get the nitty gritty on other tax issues related to charitable donations, such as how you can effectively leverage your giving power by donating appreciated securities, by checking check out Publication 526. (For an example of the tax savings you can get by giving appreciated securities, click here.

If you'd like to get a charitable deduction in a given year but aren't sure where you want to bestow your benevolence -- or perhaps you just want to postpone your contribution until the future -- you might want to consider starting a donor advised fund.

Essentially, you get a tax deduction the year you contribute assets to your fund, but can then let those assets grow and make donations from the fund in later years.

Most large fund firms, including Fidelity, Schwab, T. Rowe Price and Vanguard offer such funds (although, if you think this arrangement is for you, you'll want to check the fees and minimum required investment before opening such an account).

By the way, among the other bennies in the new tax law signed by president Obama last Friday was an extension for 2010 and 2011 of the IRA charitable rollover provision that had expired in 2009 allowing taxpayers to donate up to $100,000 from their IRAs tax-free.

Alas, this applies only to people 70 1/2 or older. Still, this can be a biggie for philanthropic-minded oldsters, as such rollovers also count toward the donor's required minimum distribution, or RMD, for the year.

Finally, if you're really serious about doing good, you'll want to be sure that the organization you're funding is actually getting goods and services to the needy.

In a feature earlier this year on the 20 best Money web sites, my MONEY magazine colleagues recommended Charity Navigator as the premier place for vetting specific charities and for getting recommendations for highly rated nonprofits in areas ranging from the arts to education to religion.

While you're taking these steps to make sure you're getting the most out of your giving, however, be sure to keep your own finances in good shape too.

Otherwise, you may find yourself going from donor to donee -- and that's something neither you nor the organizations you support want. To top of page

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