By Paula Pant, WiserAdvisor.com
It's that time of year when many people's thoughts turn to those in need.
The holidays can inspire people to adopt a generous mood. You're thankful for the blessings you've received and want to pay it forward -- and you've also realized charitable giving can lower your taxes, as well.
Whether you'd like to donate to a local nonprofit or an international cause you feel passionate about, you want to make sure your money will be used properly. Here are the basics you need to know when it comes to evaluating a charity you're thinking of donating to -- and how to claim some tax breaks for your generosity.
Is the Charity Actually Helping?
It can be tough to wade through the many options you have when it comes to charitable giving, and you've heard some horror stories about scandals like misused funds. How can you tell if a charity is on the up and up?
1. Use Watchdog Sites
There are plenty of watchdog groups online who keep an eye on charities and rate them on a wide range of factors. By doing a little bit of research, you can discover whether or not a charity has come under scrutiny for bad behavior like overly aggressive fundraising, diversion of funds or false tax reporting. You can also view specifics like how they allocate their funds, their main sources of revenue and how long they've been in operation.
2. Do Your Own Digging
Each year, charities file a Form 990 with the IRS. On this form, the organization reports its mission, activities and financial figures for the past year, including revenue, expenses and liabilities. It's a good way to get an overall picture of how the charity is being run.
By law, charities are required to make their last three 990 forms available to the public. You should be able to obtain these forms through each charity's website, but if you don't see them listed, you can also call the organization and request a copy.
You'll also want to make sure the charity has a website and that it looks polished and contains key information, such as who is on the board of directors, what activities the charity is currently involved in and how to obtain a copy of its annual report. (Super-sleuths can compare the numbers in the charity's Form 990 with those given in the annual report to make sure they match). Websites that look unpolished or don't contain recent information are a good warning sign the charity has some issues.
What are you looking for in all your analyses? Big things are how much of the funds raised are being spent on further fundraising efforts (the AIP considers 60 percent to be a "C" or passing rating), whether fundraising costs have decreased over time (they should if the charity is being run well) and what the charity's overall budget stands at.
Finally, you'll want to confirm the charity is registered properly with the state in which it's located. In most states, nonprofit groups like charities are required to register before they may accept donations, and if a charity isn't registered, it's a red flag. You can check particular states here, but bear in mind that registering is just a sign of a charity's diligence and does not mean the charity has been endorsed by the state in question.
3. Speaking with the Charity
As someone who's thinking of donating, you have every right to ask a charity for specifics, on everything from how your money will be spent to their fundraising practices. Feel free to make personal contact with a charity representative to clear up anything you're not sure about.
Make Sure You Get All the Tax Deductions
Once you've made the donation, how do you report it on your taxes? In order to qualify for the maximum deduction on your charitable giving, keep these tips in mind:
- Tax deductions for charitable contributions must be requested by filing IRS Form 1040 and itemizing all deductions on Schedule A.
- In general, you're allowed to deduct, in full, cash contributions that constitute up to 50 percent of your adjusted gross income, property contributions up to 30 percent and contributions of appreciated capital gains up to 20 percent.
- You must donate to a qualified tax-exempt organization. For more on qualified organizations, see IRS Publication 526.
- You must subtract the amount of any perks you received as a result of your donation, such as merchandise or services.
- When contributing property, you must demonstrate its fair market value and can only claim that amount. If you're donating clothing or household items, they must be in good condition.
- Non-cash contributions over $500 must be reported on IRS Form 8283, and you must obtain a written acknowledgement of receipt from the charity. Non-cash contributions over $5,000 require a written appraisal.
- Be sure to keep detailed records of all contributions you make, including keeping copies of cancelled checks, bank statements and acknowledgement letters.
- Remember some other tax tips to think about before 2014 is over.