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Which Charities Deserve Your Dollars?

Charitable giving offers valuable tax breaks, but it's also worth checking up on a charity's effectiveness.

A version of this article previously appeared in May 2021.

Gifting appreciated investment assets has long been a "win" from a tax and portfolio standpoint: It erases capital gains bills while reducing investors' exposure to highly appreciated assets, which often add risk to their portfolios.

You obviously want to make sure you get the biggest possible tax benefit from your charitable contributions. The other big consideration is that your charitable dollars stretch as far as they can to do the most good rather than being spent on overhead. The charity that tugs at your heartstrings with effective television ads or the one that sends the best stationery may not be particularly effective at deploying the funds on behalf of its stated cause.

If you're checking up on a charity, here are some of the key steps to take.

Make Sure It's On the Up and Up

A minimum first step is to make sure that the charity you're considering donating to is actually exempt, meaning that donations to it will be tax-deductible. The IRS' Tax-Exempt Search Organization Tool enables you to check whether the charity is exempt and to access its latest Form 990, which charities must file annually to maintain their tax-exempt status. You can retrieve the information using the charity's name, but because many charities have similar-sounding names, it's more efficient and precise to find the charity's employer identification number, or EIN, often available on the charity's website. Form 990 depicts information about the organization's mission and its finances, including revenue over the past two years along with expenses. (Note that because of the pandemic, there's currently a delay with processing 990s; it's not unusual for a charity's most recently available 990 to be from 2019 or even earlier.)

Digging Deeper

The fact that a charity is exempt and has filed a Form 990 is a sign that your contribution will be tax-deductible, but it's no guarantee that the charity is using funds in an effective way. You can dig into the 990 yourself to find information about the organization's finances, including revenue and expenses, highly paid employees, and board composition and independence. But it can be difficult to know what to make of this information in a vacuum, and that's where charitable watchdogs can be so helpful. Here's a look at some of the primary charitable watchdogs and what they offer.

Charity Navigator Charity Navigator doesn't require registration and provides some useful ratings and benchmarking information for free to visitors of its site. Its original star ratings, ranging from 0 to 4 stars, are available for about 9,000 charities. For the star ratings, charities are rated in two areas--financial health and accountability/transparency--and those ratings are rolled up into an overall rating. Charity Navigator's site notes that 3- or 4-star ratings are a vote of confidence in how a charity manages its affairs.

In addition, Charity Navigator has rolled out a new ratings system, Encompass, in an effort to provide ratings for smaller charities and/or those without the several years' worth of operating history required for a star rating. With the rollout of the Encompass ratings, which rate charities on a scale of 0-100, Charity Navigator brought the number of rated charities up to nearly 200,000. Encompass ratings factor in measures such as financial health, what percentage of total expenses go for program expenses, and board independence.

Because of the breadth of its ratings and their availability for free, Charity Navigator is a worthy first stop if you're looking to get your arms around a charity's worthiness, especially smaller, more localized charities that might not earn a rating from one of the other raters.

Charity Watch Charity Watch calls itself "America's most independent, assertive charity watchdog." Its site is well organized, and reports on individual charities are easy to scan and intuitive. For each charity, you can see a dashboard with ratings on a few key metrics: an overall grade (from A+ to F), the percentage spent on programs relative to overhead, and the amount the charity spends to raise $100 in donations. Charity Watch also includes helpful lists of its highly rated charities sorted by category: animals and animal protection, cancer, and homelessness/housing, for example.

Charity Watch provides a "free look" on a few charities of your choice (choose carefully!). After that, free registration entitles you to see only the details on Charity Watch's top-rated charities. A $50 annual subscription provides access to full reports for all of the charities rated by Charity Watch.

Better Business Bureau Wise Giving Alliance This site provides free ratings on about 1,900 charities on 20 different "standards of accountability," ranging from matters of governance (board size, conflicts of interest), effectiveness, finances, and fundraising/information. If a charity misses the mark on one of the 20 measures, you can click through to read the details and determine whether that issue is important to you. Those individual scores are then rolled up into an overall score of Meets Standards, Does Not Meet Standards, or Unable to Verify; not meeting one of the 20 standards will result in the charity receiving a Does Not Meet Standards rating.

GiveWell Rather than aiming to provide comprehensive information on a broad range of charities, GiveWell instead highlights those ones that it deems to be high-impact and cost-effective. GiveWell also operates its own Maximum Impact Fund, which makes grants to those charities that it believes to be doing the most good. GiveWell's focus is on global health and poverty alleviation, because it believes charity dollars directed at those areas can go the furthest to save and improve lives. The site is a good resource for givers who want their dollars to have the greatest impact rather than wedded to giving to a specific type of charity--for example, homeless animals.

GuideStar GuideStar offers a polished, easy-to-navigate interface. However, the site seems primarily focused on the professional not-for-profit audience and/or seriously large donors rather than smaller donors. In contrast with the three sites discussed above, it doesn't offer free ratings or comparative metrics on financial health or effectiveness.

GuideStar offers what it calls "Transparency Seals," ranging from Bronze to Platinum. The Transparency Seals aren't a rating of a charity's effectiveness but rather a benchmarking of how forthcoming the organization has been with information on its financials, its mission, and how it is progressing toward its stated goals.

With free registration, visitors to GuideStar's site can view a charity's latest Form 990 as well as basic information about its programs, financials, and how it benchmarks its own success. Comparative data--for example, how a charity's financials stack up relative to other charities with similar missions--and more in-depth information, such as highest-paid employees, are available through GuideStar Pro, the firm's premium service. Its price tag ($2,000/year) makes it cost-prohibitive for most mainstream givers.

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