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Make Sure Your Charitable Dollars Are Put to Work

Share current LOB: WealthManagement

You want the confidence that your charity is using your donations wisely. But how can you tell?

These accounts, which you may hold through an employer or on your own, are tax-free. You contribute pre-tax dollars, which can grow tax-free as long as you hold the account. Withdrawals for medical expenses are tax-free as well.

One easy way to keep tabs: Call the organization and ask how it puts your dollars to work. "Donors should never hesitate to pick up the phone and get their questions answered," says Sandra Miniutti, a vice president of Charity Navigator, the largest independent charity evaluator in the United States. "The best charities are happy to have conversations with their donors."

Following are some specifics to consider when evaluating your favorite causes:

Understand how much of every dollar you give goes directly to programs and services. Charity Navigator says organizations should put at least 75 percent of every donation directly towards their charitable work. This is a good rule of thumb, but it's important to put those numbers in context.

"Donors need to understand that charities have to withhold some money to raise the next dollar so they can pay the electric bill," Miniutti says. Charities with small budgets often spend a greater percentage of donations on administrative costs, while organizations that depend heavily on volunteers typically have lower overhead.

Review the charity's annual report. Many charities publish annual reports that generally are available on their websites. The report should tell you what the charity is accomplishing. Read these documents with a discerning eye.

"They can be marketing tools, so look for concrete information about the organization's impact," Miniutti says. The charity should spell out recent accomplishments such as the number of individuals it served in the past year, programs launched or legislative victories it has worked toward.

Ask for a copy of the charity's Form 990. Charities are required to provide the public with their last three years of tax filings. "How quickly they give them to you is a great check on their transparency," Miniutti says.

These forms will quickly confirm how much of the organization's budget goes to programs. You also can use the form to check CEO compensation. CEOs of large charities typically make in the neighborhood of $150,000 annually, according to Miniutti.

Make sure your charity is registered with the IRS. Charities with revenue exceeding $25,000 a year must register with the IRS and often must also report their finances to state and/or local tax departments. You can verify your charity's nonprofit status by confirming that it is listed as a tax-exempt organization on the Exempt Organizations Select Check page at IRS.gov.

Use outside resources. Charity watchdog websites can help you review reports on many charities:

  • Give.org, a service of the Better Business Bureau Wise Giving Alliance, tracks information on large charities' boards, finances and operations.
  • CharityNavigator.org lists the percentage of a charity's expenses that go directly to funding its charitable endeavors.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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