Each year, Americans generously contribute billions of dollars to nonprofits, both domestically and internationally. This financial support is crucial in enabling these organizations to fulfill their missions. However, it is important to ensure that your donation is utilized in a manner aligned with your intentions.
Before making a charitable contribution, take a moment to familiarize yourself with how your funds will be allocated. By doing so, you can make a more informed decision and have confidence in the impact of your generosity.
3 Things to Consider Before Donating Money to a Charity
When considering making a donation, whether you have the financial means or not, it is crucial to assess the charity beforehand. Are your donated dollars truly making a difference or are they predominantly supporting administrative expenses? Maximizing the impact of your donation is paramount. Here are some valuable tips to aid you in this endeavor.
1. Make Sure You’re Donating to a Legitimate Organization
It is always a good idea to review the profile of a charity on reputable watchdog sites like Charity Watch or Charity Navigator.
By searching for the organization, you can discover important details such as its address, mission statement, tax filing status, and the ratio of total expenses to total contributions. This information will help you make informed decisions and ensure that your support goes to a worthy cause.
In addition to providing information on the cost of raising $100, Charity Watch also assesses the efficiency of charities. It assigns letter grades such as A, B, or C. On the other hand, Charity Navigator rates organizations on a scale from one to four.
These evaluations help donors make informed decisions by considering factors like efficiency, performance, and financial stability.
2. Know Where Your Money Is Actually Going
You wouldn’t want your hard-earned money to benefit others, unless that’s the purpose of your donation. The metric that sheds light on where your money is allocated is known as the program efficiency or expense ratio. A higher efficiency ratio signifies a charity’s effectiveness in delivering services that align with its mission. It’s a positive indicator of their productivity and impact.
A guiding principle to keep in mind is that highly effective organizations allocate at least 75% of their budgets to programs and services, while the remaining portion is dedicated to administration and fundraising expenses.
Determining the spending ratio is remarkably straightforward. Simply visit Charity Watch and search for the organization in question. You will find a “program expense ratio” that reflects the total expenses spent by the charity on programs in relation to overhead costs.
3. Take Note of the Group’s Nonprofit Status for Your Taxes
Before making a donation, it’s crucial to verify if it qualifies for tax deduction. This is particularly significant for donors as it allows the donated amount to be deducted from their taxable income, resulting in tax savings. To ascertain the tax status of the charitable organization, look for relevant information about their tax-exempt status.
To determine an organization’s tax status, you can refer to Charity Watch or Charity Navigator. Alternatively, you can visit the organization’s website, the IRS, or GuideStar.
The most common tax statuses for charities are 501(c)(3) and 501(c)(4). While donations to 501(c)(3) organizations are typically tax deductible, donations to 501(c)(4) organizations are not.
If you’re seeking a tax break, it is advisable to seek out a 501(c)(3) organization before making your donation. This way, you can ensure that your contribution qualifies for tax deductions.
The IRS provides a valuable resource on deducting charitable donations for those seeking tax savings. It is important to note that claiming charitable donations is only applicable if you choose to itemize your taxes, which is not the case for the majority of Americans.
In fact, The Tax Foundation reported that in 2019, approximately 87% of Americans opted for the standard deduction instead.
In the 2023 tax year, the standard deduction amounts are as follows: $13,850 for individuals, $27,700 for married couples, and $20,800 for heads of household. This means that in order to benefit from a tax deduction for charitable donations, your deductible expenses must exceed $13,850 (or $27,700 if married and filing jointly).
Unfortunately, this will not be the case for many of us.