A charitable gift is a contribution that you make to a charity, special non-profit organizations, academic institution or private foundation that has tax-exempt status with the Internal Revenue Service (IRS). Most charitable donations are tax deductible and reduce the amount of taxes you pay, especially if you are someone who itemizes versus taking the standard deduction at tax time.

Why should I give to charity?

When you choose to give, you support organizations working to advance society in different ways. If there’s something you’re passionate about — health, education, hunger prevention, arts, literacy, the environment, immigration — most likely you can find a non-profit that is working in that area.

Charitable giving is a choice, but it’s one that comes with many personal, social and financial benefits:

• Receiving a tax deduction for a financial or in-kind contribution
• Supporting a cause that’s personal and that you believe in
• Helping improve a community or neighborhood
• Expanding your professional network and using your skills for good
• Connecting with passionate and like-minded people

Charitable contributions can have intangible or tangible value — you can donate just about anything, including:

• Goods (books, clothing, furniture)
• Money
• Time (volunteering or pro-bono work)
• Advice or ideas

Only contributions of goods or money carry tax benefits.

Online tools make it simple to find and support organizations that interest you and reflect your values — but they don’t always help you know whether you’re supporting a worthwhile cause.

How do I give to charity?

When considering different kinds of charitable contributions, there are different words you may come across.

Financial contributions

Financial contributions are gifts of money that you give to a charity. The easiest way to make financial contributions is online. In some cases, organizations even allow you to text donations via your cellphone provider. If you make these kinds of donations, make sure to keep track of your receipts. Avoid scams by first researching the organization before you donate.

In-kind contributions

An in-kind contribution is a gift of goods or materials — new or used furniture, computers, books, clothing, supplies — rather than money. Typically an in-kind contribution can be assigned some kind of monetary value. Before you donate, it’s a good idea to take an inventory of what you’re donating and estimate an actual value of those materials. When you make an in-kind contribution, ask the charity for a receipt where you can track what you donated and how much it was worth.

• IRS in-kind donations: www.irs.gov/publications/p561/ar02.html

Volunteering

Volunteering can take the form of personal service or professional service. Personal service is where you give your time to do activities not related to your work or career. Professional service is where you give an organization free help doing work related to your career field. Both kinds of volunteering are valuable. Before you give a professional service, check with your employer to make sure there aren’t any legal issues related to non-disclosure.

How do I pick a charity to support?

Before you donate, it’s important to make sure the charity you’re considering giving to has a current tax-exempt status and is a healthy organization.

Guide Star is an online resource for checking to see if an organization's tax-exempt status is current:

• Guide Star: www2.guidestar.org

You also can call and ask to see a copy of an organization's most current IRS Form 990 — which will tell you whether or not they have current status.

• IRS Form 990PF: www.irs.gov/charities/article/0,,id=214271,00.html

In addition to researching the charity on Guide Star, you want to get a sense of the organization’s financial picture. In general, you want to make sure your donation will go to support actual programs and not just the expense of running the non-profit organization or charity. If the charity isn’t a healthy organization, your money may not actually end up going to programs that serve those in need. In general, you want to look for organizations that have the following qualities.

Look for 85 percent programs, 15 percent operations.

In general, you want to make sure the organization is keeping its operational expenses down so that it spends more money on delivering good programs — the 85/15 rule is a good rule to follow. Usually, you can look at an organization's annual report to see what kind of financial picture it has.

There may be special cases where an organization is using funds for operations — maybe they’re going through a strategic plan, they’re doing a capital campaign and need funds for marketing, or they’re developing their professional staff — it’s okay if the balance tips every once in a while, but in general, look for ones that are using their funds for program delivery and keep expenses down.

Look for diversified funding streams.

Healthy organizations have diverse funding streams, meaning they get money from a variety of sources — individual donors and corporate, private foundation and government grants. The more diverse the non-profit’s funding sources, the healthier the organization usually is — because if one source of funding disappears, they have others to fall back on. An organization’s annual report can give you an idea of where funding is coming from.

Give locally and support something you’re passionate about.

If you choose to give — time, goods or money — to a charity in your area, you can establish a personal relationship with that organization. Before you give, you may want to stop by for a visit or tour. If you give to a local organization that is working in an area you’re passionate about, more than likely you’ll be more interested to maintain a supportive relationship.

Ask your employer and colleagues.

Some employers will match your charitable giving and many sponsor staff service days. If your workplace has these programs in place, it may have a list of organizations that it endorses. You also can talk with colleagues who are enrolled in these programs for recommendations on good charities in your area.

In some cases, you also may be able to make charitable contributions through work through payroll deduction — money taken directly from your paycheck. If you go this route, make sure your payroll deduction is noted on your pay stubs and/or on your W2 form. You’ll need this in order to take your tax deduction.

Check with a private foundation in your area.

Private foundations are organizations that are set up to support national and local non-profits. In order to win grants from these foundations, many organizations have to go through a rigorous application process and prove organizational stability and current tax-exempt status. Many private foundations have websites that list their current grantees — often by program or issue area. A foundation can be a great resource for evaluating lots of different charities at one time and finding one that fits your interests.

In addition to GuideStar and the IRS, there are a few online sources where you can find, review and connect with reputable charitable organizations:

• Charity Navigator: www.charitynavigator.org
• JustGive:www.justgive.org
• Network for Good: www.networkforgood.org
• Idealist: www.idealist.org

You also can learn more about making charitable gifts at:

• Philanthropy Journal: www.philanthropyjournal.org
• Chronicle of Philanthropy: www.philanthropy.com
• Foundation Center: www.foundationcenter.org

What are the tax benefits of donating to charities?

When you make a contribution to a qualified charity, non-profit, academic institution or private foundation, you are eligible to take a tax deduction. However, not all non-profit organizations qualify for tax-exempt status, which means you may not necessarily get a tax deduction when you make a donation. In most cases, the IRS will require documentation showing your gift in the form of a receipt, a letter from the receiving organization or another kind of financial statement. Any monetary contribution of $250 or more will require an acknowledgement from the charitable organization that should include:

• The organization’s name and address
• Donor’s name and address
• Amount of cash contributed
• Date of the contribution
• Whether the organization provided any goods or services in exchange for the contribution.

Gifts under $250 can be substantiated by a cancelled check, credit card statement, or written acknowledgement from the charity with the date and amount of the donation.

In-kind donations of up to $500 can be claimed if you itemize your deductions and can list the charity name(s), date of donation, and a general description of the donated goods. In many cases, if you donate goods that value more than $5,000 — cars, furniture, etc. — you must get an appraisal made by a qualified appraiser and attach IRS Form 8283 (Section B) to your tax return. If you give in-kind contributions of large amounts, you may want to consider working with a tax professional to ensure you’re taking your deductions correctly.

In a situation in which you receive goods or services — such as a dinner, auction items or theater tickets — in return for your contribution, be sure you have the right documentation in place. Your deduction is limited to amount in excess of the value of the goods or services received. For example, if you bought a $100 ticket to a gala dinner and the dinner was worth $40, you can only deduct $60.

The IRS has an online tutorial on taking deductions for charitable contributions:

• IRS Stay Exempt tutorial on deducting contributions:
  www.stayexempt.irs.gov/Mini-Courses/Can_I_Deduct_My_Charitable_Contributions/can_i_deduct_my_charitable_contributions.aspx

When you file your income tax return, you file your charitable contributions as an itemized deduction.

• See also: Income tax returns; Deductions, exemptions and credits

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are some online resources you may find useful:

• IRS Charities and Nonprofits: www.irs.gov/charities/index.html
• Guide Star: www2.guidestar.org
• Charity Navigator: www.charitynavigator.org
• JustGive:www.justgive.org
  
• Network for Good: www.networkforgood.org
  
• Idealist: www.idealist.org