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Everything You Need to Know About Giving to Charity

This holiday season, you’re likely to open your wallet or purse not only for your loved ones but also for charities and causes you’re passionate about.

December is Americans’ peak month for funding nonprofits and their activities: education, the arts, social welfare, disaster relief, and more. And we’ve never been more generous. Individuals’ contributions hit a record $265 billion in 2015, according to the annual Giving USA report.

This year Americans are expected to donate even more, as has happened every year since 2009. You want your generosity to pay off, of course. “It is one of the best feelings—to know with confidence that your giving will make a difference,” says Katherina Rosqueta, executive director of the University of Pennsylvania’s Center for High Impact Philanthropy.

To help you gain that confidence, MONEY has asked experts how to make your giving practices more effective in three key areas: choosing charities, making gifts, and reaping the tax benefits you deserve. Here's what they said.

Choose Right

The first challenge in maximizing the impact of your charitable donation? Finding an organization that not only operates in the area you’re passionate about but also will use your money well. “People don’t always distinguish between a great cause and a great nonprofit,” says Rosqueta. Follow these steps to make sure you do.

Look beyond the name

Donors often pick a charity based on its name alone, says Sandra Miniutti of the nonprofit information site Charity Navigator. The organization’s mission, however, might not be what you think it is. If you’re concerned about the treatment of farm animals, for example, you might decide to give to Animal Friends or the Animal Welfare Institute. But only the Animal Welfare Institute, based in Washington, D.C., is concerned with farm animals’ living conditions; Pittsburgh’s Animal Friends focuses on house pets with programs that include spaying and neutering.

The better way: Visit the organization’s website and check its mission statement, along with any reports about its programs. Another great way to learn about a charity’s activities is to volunteer. You’ll witness firsthand how the group approaches the cause you care about.

Judge by the results

How do you decide if a charity carries out its mission effectively? People often judge by a number or two, says Rosqueta, like CEO pay or money spent on fundraising. Financial data, along with other information about how a charity is run—say, does it have an independent board?—can hint at whether it would be a good steward of your money. But information about actual impact is where you should start.

“People don’t always distinguish between a great cause and a great nonprofit.”—Katherina Rosqueta, Center for High Impact Philanthropy

The better way: You have three major paths for getting clues to a nonprofit’s effectiveness, based on what you can learn online about that particular charity.

Listen to deep divers

Certain groups study nonprofits in depth to find ones achieving the best results. Your easiest option is to give to nonprofits that get their seal of approval.

GiveWell.org, for instance, puts out an annual list of charities it judges both effective and in need of funding. Its top pick now is the Against Malaria Foundation, which distributes bed nets to thwart disease-carrying mosquitoes. GivingWhatWeCan.org and TheLifeYouCanSave.org each spotlight charities trying to eliminate poverty in the developing world.

In addition, the Center for High Impact Philanthropy publishes an annual guide to causes it believes will do the most social good, complete with examples of individual nonprofits in those areas that employ donations effectively. Among organizations fighting urban blight, for example, the guide spotlights the Pennsylvania Horticultural Society, which beautifies vacant lots in Philadelphia.

These lists have their limitations: Because of the effort required to evaluate charities in detail, they end up recommending only a handful. (GiveWell .org, for one, has just four top picks, all of which operate either primarily or wholly in sub-Saharan Africa.)

Check directories

If those resources don’t cover causes you hold dear, you can consult two major online directories of nonprofits, Charity Navigator and CharityWatch. Each rates charities based on measures of their financial health, transparency, and accountability. While not directly measuring effectiveness, these ratings are designed to indicate how professionally an organization operates. And presumably a well-run organization has a better chance of having an impact than one that’s a mess.

Charity Navigator assesses nearly 8,000 nonprofits, each at least seven years old and with more than $1 million in annual revenue. Ratings on the site range from zero to four stars. The Children’s Aid Society, for example, has received four-star ratings for 16 straight years, but the similar-sounding Children’s Charity Fund Inc. has gotten zero.

CharityWatch, which rates 600 charities, costs $50 for an annual membership. But you can see its list of over 100 top-rated charities for free.

You be the judge

If a charity isn’t rated by these other sites—very likely if it’s small or locally focused—you can do a little investigative work yourself via the GuideStar website. On the free site, which lists 1.8 million U.S. nonprofits and their financial records, you can look up a specific charity. You can also search for potential recipients by keyword— say, “animal”—narrowing your query using factors such as location and size.

Once you’ve reached the individual listing of a charity that looks promising, you can learn more about it from its annual IRS return, which you can reach by clicking on the green “Forms 990” button on the right-hand side of the screen. Don’t worry: You don’t have to be an accountant to read it.

First, look at how much the nonprofit spends on administrative costs (including fundraising) vs. the programs and services it provides. Line 4e on page two of the 990 details its annual program spending; divide that by the number on line 18 on page one—the nonprofit’s total expenses for the year.

The result is the share of spending that goes to services. Be wary of charities devoting less than 75% of funds to programs, says Miniutti—and also of ones claiming to spend 100%. If a charity you’ve chosen fails this benchmark, look up past years’ reports, says Rick Cohen of the National Council of Nonprofits, since an occasional expenditure such as a renovation might have skewed its ratio in a particular year.

And charities may have high overhead expenses for legitimate reasons, such as the cost of starting up, says Timothy Seiler, a professor of philanthropic studies at the Indiana University Lilly Family School of Philanthropy.

As for CEO compensation—also listed in the 990—compare it to that of heads of similar charities. Also, look for a board of directors with at least five independent voting members, neither related or reporting to the CEO. Line 4 on page one of the 990 will give you a count.

Hang up early and often

Your phone rings with a fundraising pitch for a noble cause, perhaps in response to a disaster like Hurricane Matthew or the mass shooting in Orlando. So you give. But that unsolicited phone call—or email or message on social media—could be from a scam artist. Even if the fundraiser is legitimate, only a fraction of what you give might reach people in need.

The better way: Feel the urge to give? Do it directly through that organization’s website or mailing address. Avoid giving through a third party or via links sent in emails; even if the charity is real, the fundraiser may not actually represent it. And even legitimate fundraising costs can be too high. Daniel Borochoff, who founded CharityWatch in 1992, says the data he has seen indicates that, on average, telemarketers’ fees eat up two-thirds of the money they raise.

There’s an even better strategy, says Miniutti. “Don’t wait to be approached,” she says. “If you want to donate, pick a couple charities you care about and make a commitment to give to those groups this year. This way you avoid giving in that knee-jerk reaction way.”

Give Right

Once you’ve figured out the cause or causes important to you, the next challenge is making your donations in a way that maximizes their impact. So do you give to individuals or to an organization? Do you spread out your gifts or bestow them all on one lucky recipient? Strange as it may sound, says Seiler, “it is hard to give money away prudently.”

Keep your head in the crowd

One in five Americans have contributed to personal appeals on websites like GoFundMe and CrowdRise, according to a 2016 Pew Research Center study; GoFundMe says it has raised more than $3 billion since 2010. Nonprofits can raise money through these sites, and so can individuals in need—for example, someone who is struggling with medical bills. Twenty-eight percent of crowdfunders have given to someone they didn’t know, Pew found. Such unfamiliarity poses a risk, says Miniutti. “That person has no legal obligation to use the funds raised for the stated purpose,” she says. When 430 fundraisers on GoFundMe raised money for Orlando victims—more than four for each of the 49 killed and 53 wounded— knowing whom to trust wasn’t easy.

The better way: Donate only to campaigns run by people you know personally, advises Miniutti. And because crowdfunding sites typically charge a 5% fee on each donation, avoid giving to a person crowdfunding for a charity, no matter how much you trust the person or how good the cause. Instead, dodge the crowdfunding fee by giving to the nonprofit directly

Play favorites

In the hopes of spreading love, people give small amounts to lots of charities. Small gifts, though, have relatively high administrative costs. The $3 it might cost a charity to handle a donation, for example, is only 3% of a $100 donation— but 30% of a $10 gift.

The better way: "Concentrate your giving, rather than diversifying like with the stock market,” says Miniutti. Bolder Giving, a nonprofit aiming to encourage people to make larger charitable donations, recommends a 50/30/20 rule: Focus half your giving on one charity or a select few that are most meaningful to you. Mark 30% for gifts to local nonprofits, such as your house of worship or the school PTA. Use the remaining 20% for “impulse” gifts, such as donations for disaster relief.

The exception? When you’re just starting to support a cause. Giving smaller amounts to several organizations focused on that issue is a smart way to learn about them and see which you prefer, says Rosqueta.

“Concentrate your giving, rather than diversifying like with the stock market.”—Sandra Miniutti, Charity Navigator

Don't be a burden

People often make donations based on their mistaken beliefs about what charities need, Rosqueta says. Gifts that aren’t on an organization’s wish list or that come with restrictions can hurt as much as help, she says. Directives with donations—for example, that they be spent in a certain town—can hamstring a nonprofit, says Rosqueta. “A charity then has to spend more time and resources handling your donation and ensuring specifications are met,” she says, “diluting your gift’s potential.”

Donating goods can also make problems. After the 2004 Indian Ocean tsunami, says Rosqueta, donations of unneeded clothing—winter coats, for example—clogged ports, hampering delivery of urgently needed supplies.

The better way: Avoid adding caveats to your cash. But if you really want to, work with the organization to find a way that allows the nonprofit to still achieve its goals, says Cohen. Be realistic: This approach makes sense only if your gift would have a major impact on the charity’s budget.

Before you give goods, check on an organization’s website to see what it actually needs. For example, Dress for Success, an organization dedicated to women’s economic empowerment, accepts pantsuits and scarves, among other clothing donations, but not jeans or used panty hose.

Get Taxes Right

You can give to others and still get a tax benefit. But to fully enjoy Uncle Sam’s generosity, you’ll have to follow his rules. The IRS doesn’t reward all donations to nonprofits, for example, and a non-cash gift may be your best bet for a sizable deduction.

Go cashless

People tend to give money via cash, check, or credit card. But sharing your wealth differently can pay off.

The better way: Score a bigger break by donating appreciated assets or by redirecting to charity your annual required minimum distributions (RMDs) from an IRA.

Give stock

The market has more than tripled in value since its 2009 lows. Avoid capital gains taxes on appreciated assets by passing ownership directly from your brokerage account to a charity, advises CPA Henry Grzes of the American Institute of Certified Public Accountants. You’ll benefit even more if you itemize, since you’ll be able to deduct the stock’s value. If, on the other hand, you sell the assets first and then donate the proceeds, you’ll instead owe taxes on the gains.

Tap your IRA

Over age 70½? Have your IRA administrator give your annual RMD to a charity. That will reduce your adjusted gross income, possibly lowering your tax bracket, says Grzes. This move is clearly a winner if you don’t itemize; if you do, the math is murkier.

In each case, check with the charity before donating to ensure your gift is handled correctly.

Mind your 3s and 4s

People treat all nonprofits equally, but the IRS doesn’t. For your donation to be recognized, it must be made to what’s known as a 501(c)(3) nonprofit. A nonprofit known as a 501(c)(4), which can devote itself to lobbying on behalf of its mission, doesn’t count; nor do charities outside the U.S.

The better way: See whether a nonprofit is a qualified charity by using the IRS database at money.us/irs-charity. For foreign donations, Grzes suggests looking for nonprofits titled “friends of,” which are typically qualified charities set up to allow U.S. donors full tax benefits. One such charity: Friends of Women’s World Banking, which collects money for a financial empowerment charity based in the Netherlands.

Give, don't receive

It’s fun to get those thank-you gifts charities give in return for donations, but there’s a hidden cost. The amount of your donation that you can claim on your taxes is reduced by the fair market value of any gift you receive in return, says Grzes.

The better way: Ask yourself: Do I really need that tote bag? Forgo any such gifts or increase your contribution to cover their cost. You then can take the deduction you want, and the charity will receive the amount you originally intended to hand over. If you give cash or property totaling $250 or more, you must have a bank record or a written acknowledgment from the recipient showing the amount contributed and whether the organization provided any goods or services in return.

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