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Tax Benefits of Philanthropic Activity

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Donating funds to charity not only fuels the spirit, it can aid your financial situation by providing a tax deduction. Before you make any donation, make sure the organization is classified by the Internal Revenue Service as qualified to receive tax-deductible donations. Such not-for-profit organizations are typically designated as 501(C)(3) organizations.

Within such organizations are three sub-groups: public charities, private foundations, and private operating foundations. A public charity receives most of its income from the public and/or the government. Private foundations receive income from investments and endowments and they typically use their funds to award grants to others. A private operating foundation is a private foundation that donates funds directly to causes, rather than to other charities.

When you are considering making a financial donation, contact the organization and request a copy of their Form 990. A Form 990 is required by law, and it lists an organization’s scope of activities and latest financial statements. You can view the information and determine if the organizational initiatives match your interests and beliefs. The National Charities Information Bureau recommends an organization spend at least 60% of their income on program activities, and only 40% on operating costs. If the Form 990 reveals vastly different ratios, you might want to consider another organization that makes more efficient use of the donations they receive.

When making donations, make sure you receive proper documentation of your gift. Check with your accountant or financial advisor to ensure you receive the proper financial benefits from your charitable giving.

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