Contributing to charity is a common way to support your community and potentially reduce your tax burden, provided you donate to a reputable organization. However, some donors overlook the importance of due diligence before making contributions. This oversight can lead to unexpected tax liabilities or, worse, donations being misused by less-than-scrupulous groups.
Fortunately, distinguishing reputable charities from dubious ones is generally straightforward. By conducting thorough research, asking pertinent questions, and familiarizing yourself with red flags of suspicious charities, you can steer clear of scams and ensure your donations serve their intended purpose, all while safeguarding your tax interests.
Research Your Options
Many individuals opt to donate to prominent national and international charities such as the American Cancer Society or the Red Cross. These organizations’ established reputations typically ensure that donations are used judiciously and efficiently. While reviewing their official financial reports can provide additional reassurance, thorough research becomes particularly crucial when considering smaller, lesser-known, regional, or local charitable groups.
Here are some pointers to kick-start your exploration of potential charities to support:
Find a Cause That Inspires You
Instead of giving just for the sake of it, focus on causes that deeply resonate with you. Investing in a cause you connect with personally can enhance your commitment. With numerous reputable organizations doing valuable work, prioritize those aligned with your core values. Begin by searching terms like “reputable charity,” “best charity,” or “tax-exempt charity.”
Understand the Organization’s Mission
Many charities use broad, generalized terms like “fight poverty” or “eradicate disease,” and phrases like “raise awareness.” While these appeal broadly to potential donors, it’s essential to delve deeper. Look for specific, actionable initiatives the charity undertakes to achieve its mission. Clear, transparent details should be readily available on the charity’s website or literature.
Decide How to Allocate Your Money
After identifying several charities aligned with your interests, decide on your approach. Would you prefer to distribute smaller amounts among multiple organizations or concentrate a larger sum on one or a few? There’s no definitive answer; your decision should reflect your priorities and goals.
Once you’ve narrowed down your choices to a shortlist of preferred charities, proceed to conduct thorough due diligence before making your donation.
Perform your Background Research
When conducting background research, your primary focus should be on how a charity utilizes donor funds to achieve its goals. Charities are legally obligated to disclose detailed financial information to maintain their tax-exempt status. Reputable charities readily provide financial statements upon request.
Here are key considerations when reviewing an organization’s financial information:
- Percentage of Funds Allocated to Programs Evaluate what portion of donated funds directly supports the charity’s programs and objectives.
- Operating Costs Relative to Similar Charities Compare the organization’s operating expenses with those of similar-sized charities to gauge efficiency.
- Executive Compensation Examine salaries of top-level executives and compare them to counterparts in comparable organizations within the same sector.
Look a Bit Deeper
Look beyond just the financial figures. Similar to the private sector, charities may need to offer competitive salaries to attract highly skilled professionals, particularly in leadership roles. This strategic investment can help the charity operate more effectively and achieve its goals more efficiently. Avoid automatically assuming high salaries are problematic unless there are other concerning signs.
Beyond financial considerations, consider the following when evaluating potential charities:
- Fundraising Methods: Understand how the organization raises its funds. If it uses crowdfunding, be aware that these platforms often have limited oversight over fund usage.
- State Regulator Reviews: Check with your state’s charity regulator to review any reports or assessments they may have on the organization. You can find your state’s regulator here.
- Independent Evaluations: Seek feedback from independent organizations such as Charity Navigator, Better Business Bureau’s Wise Giving Alliance, GuideStar, or Charity Watch.
If your research uncovers significant issues or other troubling information, it’s wise to remove the charity from consideration.
Confirm the Organization’s Tax Status
Confirming the tax status of any charity you’re considering is a crucial step in your research. This aspect is so critical that it deserves special attention.
In the United States, legitimate nonprofit organizations qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code, according to standards set by the IRS. This designation signifies that the organization is recognized by tax authorities and is exempt from most federal and state taxes. If you donate to a charity with 501(c)(3) status, your contribution is typically tax-deductible.
However, it’s important to note that some organizations, such as churches and certain religious entities, may be exempt from the requirement to obtain or maintain 501(c)(3) status. Donations to these organizations may also qualify for tax deductions. Nevertheless, it’s advisable to confirm this status formally with the organization’s representatives before making any donations.
Steer Clear of Scams
If you’ve followed the recommendations above, chances are good that the charity or nonprofit you’re considering is trustworthy. However, given the prevalence of scams in the charity sector, it’s wise to be aware of other warning signs that may indicate an organization to avoid.
Be cautious if an organization engages in any of the following practices:
- Requesting payment via wire transfer.
- Initiating unsolicited donation requests and using high-pressure tactics to secure immediate contributions.
- Persistently contacting you after you’ve expressed potential interest in donating.
- Failing to register with tax authorities.
- Claiming that 100% of your donation goes directly to the cause, which is typically not feasible as every charity incurs some overhead costs.
When reviewing financial statements, observe if the organization appears to be accumulating a large and growing amount of liquid assets. Generally, charities should not hold more than three times the amount of their current year’s budget in cash or other liquid assets. Higher levels may indicate the organization is not using funds effectively for its stated mission.
Lastly, for tax purposes, remember that you can only claim deductions once the donation is completed. Pledging to donate cash or assets is not sufficient; the transfer of money or assets must occur before you can claim tax benefits.