Now that the holiday season is in full swing, charities are making their final year-end pitches to raise money. Charity Navigator, a non-profit organization that helps donors give intelligently, predicts that individual donors will give at least $100 billion to charities this holiday season. While the sentiment of giving is wonderful, it is important to be careful about how you give. Begin by verifying the charity’s name. With over one million charities in the U.S., it’s easy to have a case of mistaken identity. For example there are hundreds of charities with “cancer” in the name, so be sure that your money is going where you want it to go. This is especially important if you are being solicited on the phone or in person, which is why I advise never to give in these ways, regardless of your familiarity with the organization. Just ask for all materials via snail mail or e-mail, so you can review the materials without pressure.
Once you have the information, check out the charity’s mission, program and finances on line. If all seems legit, then it’s time to see whether the organization is efficient, ethical and effective. Charity Navigator provides 0 to 4-star rating system, which includes a review of each charity’s fiscal performance. The site also helps you understand what portion of your donation goes to support overhead, versus goes to the cause itself.
Most people give to charity for altruistic purposes, not the tax deduction, but Uncle Sam does reward your kindness. That’s why it is critical to know the difference between “tax exempt” and “tax deductible.” Tax-exempt means the organization doesn’t have to pay taxes. Tax deductible means you can deduct your contribution on your federal income tax return. You can check an organization’s tax status at www.irs.gov/app/eos.
If the donation qualifies and if you itemize deductions, charitable contributions made to qualified organizations may help lower your tax bill. (See IRS Publication 526 for rules on what constitutes a qualified organization.) You have until December 31st to make your donations if you plan to deduct them on your 2013 tax return.
To claim the charitable deduction, make sure that you maintain a bank record, payroll deduction record or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.
The IRS has more specific rules based on what type of contribution you make. The general categories include:
Cash or property equaling $250 or more: In addition to the written records, the IRS wants to know whether the organization provided any goods or services in exchange for your gift. If so, then you can deduct only the amount that exceeds the fair market value of the benefit received.
Just like investing, the more information you have about charitable giving, the better you will feel about it. By educating yourself, your generosity will pay long-term dividends to you and the organization.