How to Donate like a Pro

In a Time of Tighter Budgets—For Benefactors and Charities Alike—It's More Important Than Ever to Make Your Gifts Count. Here's How

Investors demand a good return from their assets. Now donors are increasingly seeking the same for their charitable dollars.

Many philanthropists, large and small, are anxious about writing checks—and many endowments have yet to recover fully from the bruising they took during the financial crisis. Finding the worthiest, most-efficient organizations to maximize the impact of your donations couldn't be more pressing.

Yet identifying the best charity can be as difficult as picking a good money manager, with philanthropists left to navigate a world of tax forms, ratings systems and often misleading jargon. It's easy just to write a check and hope for the best—but you stand the risk of getting a poor return on your charitable investments.

Making matters more complicated: Many long-cherished tax breaks are coming under fire. Next year could bring the return of limits on itemized deductions, including those for donations, if Congress doesn't extend the Bush-era tax cuts for couples earning more than $250,000 ($200,000 for individuals). Even if Congress extends the cuts for all, the idea of cutting back charitable tax breaks is still in play: President Obama's deficit commission this week proposed limiting the deductions for large gifts to amounts above 2% of adjusted gross income.

All this is making donors rethink their giving strategies, says Patrick Rooney, executive director of the Center on Philanthropy at Indiana University. "They want to make sure now more than ever that they're using their money wisely."

Overall giving is down sharply from its recent highs. Among high-net-worth households—who account for the bulk of individual charitable dollars—average giving dropped 34.9% to $54,016 in 2009, from $83,034 in 2007, according to a survey conducted by the center and sponsored by Bank of America Merrill Lynch.

The downward trend appears to be continuing. One in five people say they are giving to fewer organizations than in the past, according to a November poll from Harris Interactive. A third are giving in smaller amounts this year than last. And the percentage of people not giving at all has doubled to 12% in 2010 from last year.

There are a host of charity-rating agencies to consult, but to get a more-accurate picture, consider volunteering your time before giving money. Do your own research: Talk to beneficiaries, visit work sites and study a group's finances yourself to judge the effectiveness of its programs.

That's what Denise Winston did. The former business banker "always just wrote a check," she says. But after leaving her job and starting her own financial-education business in 2009, the Bakersfield, Calif., resident became more frustrated over how little of her donations were going to beneficiaries. She decided she would spend time volunteering with different organizations before giving, partly to get a better sense of her time and money's impact.

"I'm closer to the person receiving support," she says. "Anyone can write a check. But I like to give things you can't buy."

Here's how to navigate the system and make sure the dollars you donate are making the biggest impact possible.

Article continued at Wall Street Journal.com, includes ways of gauging donor's impact and red flags that donors should watch out for.