We’ve all heard the saying “put your money to work” but is it possible to make your money work for a good cause? With the right tools, you can ensure that your charitable donations not only have a positive impact on society but also have a positive impact on your finances. Although charitable donations may not be profitable as your primary investment strategy, tax deductions and Donor-Advised Funds make it possible for your good deeds to pay off both literally and figuratively. We’ve amassed a few tools and best practices to get you going:
Where do I start?
First thing’s first, you need to identify which cause you would like to support. It is easier to start broad with the cause and then narrow your options down to the organization. Ask yourself what you are passionate about. Once you have a focus for your contribution it’s time to dig into the individual foundations.
When doing your research, consider a couple of things… how to donate in the smartest way possible and where exactly to put your money. If you’re looking for more of a return on your investment than just “good karma,” visit the Internal Revenue Service to find out if the organizations you are researching are in fact eligible to receive tax-deductible contributions. It’s important to note that “tax exempt” and “tax deductible” are not the same. Being tax-exempt means the organization doesn’t have to pay taxes while tax deductible means you can deduct your contribution on your federal income tax return.
How do I know if the cause is legitimate?
Unfortunately, there are con artists who run false organizations to take advantage of a potential donor’s goodwill and use the same methods that many good charities use. Your first step should be to research the organization in great detail when considering any kind of charitable donation. A helpful tool during this part of the process is Charity Navigator, which can help you verify a charities accountability and transparency. Another helpful place to start your journey is Give.org which is run by the Better Business Bureau’s Wise Giving Alliance.
Often times, separating a scam from a worthy cause can be as simple as picking up the phone to get the exact name, address and point of contact. Additionally, using a search engine to research the name of the organization online along with the words like “fraud,” “scam” or “complaint” is an excellent way to spot trouble early. Finally, be sure to keep an organized record of your donations as you would with any other investment.
What If I can’t decide?
If you’ve done your research and still aren’t able to make a decision, GiveWell and other similar websites can be an excellent tool. GiveWell identifies top-rated charities that are evidence-backed, thoroughly vetted and underfunded. Another option for the big-hearted but indecisive investor is putting your money in a DAF or donor-advised fund. When you make a donation to a DAF, you get tax deduction for the full amount in the year in which you give. Additionally, you are able to invest your money in a variety of mutual funds within the fund.
How do Donor-Advised Funds Work?
The National Philanthropic Trust defines DAFs as a philanthropic vehicle established to allow donors to make a contribution and receive an immediate tax benefit. It also allows the donor to recommend grants from the fund over time. To participate in a DAF you would first make an irrevocable contribution of personal assets and instantly receive the maximum tax deduction that the IRS allows. Your contribution would then be placed into a donor-advised fund account where it can grow tax-free.
What Are My Other Options?
If donating money or investing assets seems like too great a commitment it can be equally valuable to give your time. Any nonprofit would agree that every monetary donation helps but giving money is no comparison to the experiences that you will have and people you will meet. Whether you choose to donate in dollar bills or sweat equity, be sure to establish an annual donation plan. This way, you can budget your time and money accordingly for the year ahead.
No matter how you ultimately decide to invest, we want to empower you with the knowledge to choose the strategy that works best for you. Download this free investment terms glossary and become fluent in the language of money.