Government and Media & Marketing and Philanthropy

Givers should be smart as well as generous, experts say: Do your homework before donating to any cause

September 26, 2005

Charitable giving often is a spur-of-themoment thing, particularly if it's a response to a disaster. Still, charitable groups, relief agencies and financial advisers say a little thought before making a donation is a good idea.

Giant disasters such as Hurricane Katrina jolt many people into trying to help, often with no particular idea beyond simply doing something. However, some types of help are more helpful than others.

Properly following the rules of charitable giving can provide a tax benefit. It also is important to remember that disasters attract scam artists who trick people into making donations that don't help the intended target or the donor.

According to local experts, there are some basic rules anyone wanting to donate should follow. One easy and basic one is to give money and give it to an established organization such as the Red Cross or the United Way.

Money is the ideal donation for several reasons. For one thing, it's a lot easier to get money to a disaster site than tons of goods such as clothes or canned food.

"Moving stuff across the country is incredibly expensive," said Chris Hintz, a marketing and communications associate for the Red Cross of Greater Indianapolis. "Moving money doesn't really cost anything."

Gene Temple, executive director of the Center for Philanthropy at Indiana University, made the same point.

"It's the easiest way of getting the product to where it's needed," he said.

And established charities have track records of effectiveness.

Giving big

"The biggest ones are the easiest to hold accountable," Temple said. Their board members are publicly known, their performance is on record, and their financial data is available for review, he said.

These large groups also have the resources and infrastructure to turn the donations into effective help at the disaster site, Temple and Hintz noted. They have the staff, the equipment and other resources that can go immediately to New Orleans, for example, and start making an immediate difference.

One issue that can come up, though, in making a donation to a group like the Red Cross is whether that money is earmarked for specific disaster relief or goes into the charity's general funds. Temple noted that donors often want their money used for a specific cause.

Still, Temple and Hintz noted, organizations need to pay their employees and have the equipment on hand to respond immediately when a crisis occurs.

Groups like the Red Cross show up at a disaster with the resources they already have on hand. They can't afford to wait for new money to come in before buying supplies. This reality still hasn't sunk in with many folks, Temple said.

"What the American public didn't learn from 9/11 is that these organizations require funding to support their infrastructure," he said.

Tax implications

Individuals and corporations also should keep the tax implications of their contributions in mind. The U.S. government makes charitable donations tax-deductible as long as certain guidelines are followed. Every dollar donated can be deducted from taxable income, but the deductions must be made to a charitable body that is registered as such with the IRS.

Donations to an individual or a charity that is not registered, on the other hand, probably can't be claimed.

These longtime rules, however, are being supplemented by new guidelines being rushed through Congress in response to the sheer magnitude of the Katrina disaster.

Jay Feller, a principal at Somerset CPAs PC in Indianapolis, noted that individuals can donate up to 50 percent of their adjusted gross income in cash and be able to deduct that amount from their income tax payments. A corporation can donate up to 10 percent of its taxable income and be able to deduct that amount.

The recipients have to be listed with the Internal Revenue Service as a non-profit 501(c)3 for the deduction to be allowed, he said. Individuals also have to itemize on their tax forms to make the deductions.

There are more complicated ways of making donations. For example, someone might decide to donate some trucks to disaster relief efforts.

Local Red Cross volunteer Paul Kortepeter, an attorney with Indianapolis law firm Sommer Barnard, said this type of donation can be deducted up to 30 percent of the income tax liability. However, if the total value of the trucks (or any other kind of property) is $5,000 or more, a separate form has to be filed with the IRS and the donated items have to be appraised by an outside source.

Giving funds

Some investment firms have created charitable-giving funds. Charles Schwab & Co., for example, offers something called the Schwab Fund for Charitable Giving, which can be established by completing an online fill-and-print application.

The assets of the account are invested for tax-free potential growth, but grants of $250 or more can be made at any time from the account to any public charity.

There are a number of other approaches to making charitable donations, including various kinds of trusts or gifts of stock.

These more often are used to provide ongoing funding to a charitable group rather than in response to a disaster. The procedures are fairly elaborate, making professional advice a good idea.

"It is important to discuss your objectives and concerns with your financial consultant and your tax and legal advisers," said Thomas Foster, a financial planning specialist for Smith Barney in Indianapolis. "Together, you can develop a charitable plan that addresses your unique financial situations so that you can effectively transfer wealth to your charity."

Of course, you want to make sure you transfer wealth to a real charity, not a fake one.

Every disaster brings out con men, but there are ways for donors to protect themselves.

Be wary of telephone or email appeals for aid. If the group isn't familiar, always ask for a Web site or a list of directors. Ask how long the group has been in existence. You can contact the IRS to see if the group is listed as a not-for-profit.

There are various Web sites, such as www.guidestar.org, that identify legitimate not-for-profits.

Hintz noted that the Red Cross sometimes, as with Katrina, allows other groups to raise money on its behalf. But con artists are known to set up scams using the Red Cross name. The best approach is to call the local Red Cross headquarters to find out who's a fake and who's legitimate.
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