By Mary Pilon

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.

Do Due Diligence

Just as you would check a company's financials before buying its stock, you should do the same before giving money to a charity.

There are two forms donors should request from charities before writing a check: the federal Form 990 and a charity's annual financial statement, which lay out assets, liabilities and the amount spent on fund-raising and programs related to a group's mission. Both are filed annually. A nonprofit should be able to provide both of them—or you can get them for free at websites such as GuideStar.org and CharityNavigator.org.

The 990 form, required by the Internal Revenue Service, provides a snapshot of a charity's assets, liabilities, revenues and expenses. Financial statements, which are required by most states, may provide more-detailed information about specific programs and generally will be more current and easier to read than a 990. Both also will provide the group's mission statement.

"If you don't understand a charity, don't invest in it," says Bob Ottenhoff, CEO of GuideStar.

Looking purely at financial forms may not show all about a nonprofit's structure. For example, only 37% to 61% of United Cerebral Palsy's funding goes to programs, according to the American Institute of Philanthropy, a Chicago-based charity-ratings group. That percentage earned the Washington-based UCP an "F" rating from the institute.

But the UCP acts as the hub for 100 affiliate organizations, which means that the majority of program spending would be accounted for on affiliate filings, not the 990s for the main organization, says Michael Hill, the nonprofit's senior vice president of external affairs. "In reality, 85% goes to our mission," Mr. Hill says.

Some nonprofit-ratings sites, including Charity Navigator, also offer ratings for universities and private schools. Experts recommend that donors to educational institutions restrict their donations—that is, specify that they go to a specific cause, such as a department or scholarship fund. Otherwise, they may go toward overhead expenses, says Ann Kaplan, a researcher with the Council for Aid to Education, a nonprofit research group.

Gauge Impact

Harder to measure than financials is the impact a charity has in its community. One way to do that is to volunteer before making a donation. The website GreatNonprofits allows users to review and comment on charities, much like Yelp does for reviews of restaurants or stores. Comments and ratings may come from volunteers, donors or people affected by a charity's mission, says Perla Ni, the site's founder. Charities have a chance to comment on any complaints.

Small donors can take cues from how large foundations vet and look for results in projects. "How those dollars are going to make a difference can be a very difficult thing to figure out," says Katie Hood, CEO of the Michael J. Fox Foundation for Parkinson's Research, which devotes 86% of its funding to programs.

Thinking long-term and bearing in mind the nature of the investment helps. The Fox Foundation has a team of six Ph.D.s who evaluate different research projects, some of which may carry risks of not achieving their goals. "There's a failure rate to science," Ms. Hood says. "But when we see success, we can point to things with our fingerprints all over them."

Outside evaluations can sometimes contradict one another. For example, the Better Business Bureau evaluates national charities through its affiliated BBB Wise Giving Alliance. Those groups that meet 20 standards are referred to as "accredited charities," and such groups can also participate in a licensing agreement with the group's Charity Seal Program for a fee that ranges from $1,000 to $15,000, depending on the group's size.

At least six charities in the Charity Seal Program received "F" ratings in the last few years from the American Institute of Philanthropy or two-star or lower ratings from Charity Navigator. Yet several dozen groups that receive high ratings elsewhere may fail to meet the BBB's standards, says Bennett Weiner, chief operating officer of the BBB Wise Giving Alliance.

Donors should look beyond financial statements to judge a charity's effectiveness, says Mr. Weiner. "Solely focusing on financial ratios provides in some cases a false positive," he says. "Our criteria address governance, finance, fund-raising and other aspects of a charity's operations."

Few accountants will do due diligence on the charities or ratings groups, although some check the IRS's published list to make sure a charity is tax-exempt. Ratings should be one of many factors donors should look at for clues about efficiency, but not the only one, says Ken Berger, CEO of Charity Navigator.

Michael Cavendish, a lawyer in Jacksonville, Fla., used to be a "$1,000 guy," writing about $10,000 in various checks to different charities each year. He says he got tired of trying to calculate administrative costs.

So he decided to donate his time and money. In April, Mr. Cavendish began volunteering for various human-rights legal causes and started his own fund to raise money for students at local universities to study human rights. His goal: to raise $100,000. "One hundred percent will go to the kids," he says. "It feels more natural."

Watch Fund-Raising Costs

Donors should consider avoiding groups that devote a lot of money to fund-raising or marketing. Last January, New York Attorney General Andrew Cuomo sued four for-profit companies hired to raise money for nonprofit groups, alleging that they claimed they kept 76% of the $16 million dollars they raised. One for-profit company named in the complaint, Caring People Enterprises, was allegedly hired by the nonprofit Onondaga Volunteer Firemen's Association to raise money. Of the $2.5 million it raised, Caring People—which has since shut down—kept 73%, according to court records.

"We've contracted with a new telemarketer and are working with the attorney general's office to come up with a correct script and contract," says a spokesman for the Onondaga group.

Beware: The definition of "program funding" can be slippery. Some organizations may slap a few paragraphs of "educational material" onto a fund-raising mailing and count the expense as "program funding" rather than "fund-raising" in order to make their balance sheet look more appealing to donors and rating groups, experts say.

Other Red Flags

Potential donors of large gifts should also look at the amount of "unrestricted assets" and reserves of a charity, which, again, can be found on the 990 or financial statement. Among the possible warning signs: two or more consecutive years of red ink; little or no reserve funds; or overdependence on one source of funding, such as a big donor or government grants.

"These days a lot of organizations are under water," says Frank Jakosz, a certified public accountant at Grant Thornton in Chicago. "You want to make sure they have enough assets to continue operations." This year, for example, a number of symphony orchestras have had serious financial trouble, among them the Louisville Orchestra and the Detroit Symphony Orchestra.

Another thing that may eat into the return on a charitable donation: when board conflicts lead to lawsuits. Such issues may not be found on the IRS forms, and you may have to do your own online research.
Consider Tax Issues

Giving in a tax-wise manner can't only ease your burden—it also can help to maximize your gift. The deductible amount of a donation is limited by what you are giving and how much, and to whom it goes. The rules can be complex. Donors of cash can deduct as much as 50% of their adjusted gross income, but donations of art or collectibles over $5,000 require a certified appraisal, says Ted Sarenski, a CPA in Syracuse, N.Y.

For many, the most tax-efficient gift during one's life is appreciated property such as shares of a publicly traded stock, experts say, because the law allows the taxpayer to take a full deduction for the share's value, without having to pay tax on any appreciation.