The holiday season has arrived. For many of us, the holidays mean too much food, too much shopping and, at times, too much family. But the season also gives us a chance to give thanks for what we have and to remember that many people are not so fortunate.
That realization prompts millions of Americans to give to charities during the holidays. In fact, for many charities, the holiday season has become a make-or-break period. Much like retailers, charities typically receive more donations in the fourth quarter than during the rest of the year.
But with 850,000 nonprofit organizations vying for Americans' dollars, many people find it difficult to choose which group to support. How do you find a charity that performs work you feel helps the world? How do know if the group is legitimate and operates ethically?
Thankfully, the advent of the Internet has made answering these questions fairly painless. A quick check of a couple of Web sites can provide you information needed to find out which charities are legitimate and which do the most good with the funds they are given.
Start by checking out GuideStar (www.guidestar.com) and Wise Giving Alliance (www.give.org). These sites allow you to search charities by cause -- GuideStar even allows you to isolate groups in your area.
Once you develop a shortlist of charities that do work you're interested in, your next step is to make sure that the charities are recognized by the Internal Revenue Service (IRS). In order for your contribution to be deductible on your income tax return, the organization must meet at least minimum standards of being a legitimate organization. Now, just because the group receives IRS approval as a tax-exempt charity doesn't mean that it spends donations wisely. Not even close. But at least you'll know that you'll receive a tax deduction for your contribution.
Once you've determined that the charities are IRS-approved, you'll want to see what the watchdog groups have to say about them. The Institute of Philanthropy (www.charitywatch.org) and Charity Navigator (www.charitynavigator.org) rate charities on how well they spend donations. They also will give you a description of the charity and its work.
However, be aware that much of a charity's rating on these sites is based on one number: the program ratio, which is the percentage of the charity's income that goes to its underlying cause rather than to administrative or fund-raising costs. While this is without a doubt an extremely important number, you need to understand that it's not the only piece of information you need.
Generally, at least 60 percent of an organization's funds should go to its programs or services. But remember, this is a guideline, not a strict calculation. Different groups will have varying administrative costs.
For example, new charities tend to spend more on fund-raising costs as a percentage of their income than older charities because it takes them more effort to get the word out about their charity. Also, charities that support that support controversial issues -- such as, you guessed it, gay rights -- often spend more on fund raising since they are less likely to receive large corporate donations.
Just remember that when you're researching a charity, make sure to compare the group's program ratio with similar charities.
Now that you've picked a charity or two that deserves your hard-earned money, you need to make sure you follow the tax rules. In order to write off your donations, you need to itemize and keep immaculate records. If a single gift is less than $250, you have several options for documenting the donation: a canceled check, your checking account statement, a copy of your credit-card bill if you put the donation on plastic or a receipt from the charity. Give away $250 or more, and you need a letter or receipt from the nonprofit.
For that tiny minority of you out there who have done well in the stock market over the past few years and who are feeling generous, you might want to consider giving some of your appreciated stock to a charity rather than cash.
According to IRS rules, donors of appreciated stock are not liable for any taxes on capital gains from the donated securities. In essence, you get two tax breaks: avoiding the capital gains taxes and deducting the value of the securities. (Who says the IRS doesn't care?)
On the other hand, if you own shares that have fallen in value, sell them first to claim a capital loss on your tax return and then donate the proceeds to charity.
Giving to charities can be a wonderful way to give thanks this holiday season. But remember, a little bit of homework on your part will ensure that your donation goes into the right hands.