Tax consequences of charitable crowdfunding
Donation-based crowdfunding has become very popular as an easy way to raise funds for individuals in need. Several websites are available to raise money for personal and business uses, with GoFundMe the largest and most commonly used platform to raise personal-need funds. GoFundMe is a vehicle for fundraising, not a charitable organization as defined by IRC Sec. 501(c)(3). Here are some tips on the tax consequences of personal gifts to individuals with financial needs such as illness, death, or job loss and the effect on the donors who are willing to help them.
Claim allowable income tax deductions
A charitable contribution is deductible for income tax only if it meets certain criteria. A deductible contribution must consist of a voluntary transfer of money or property to an eligible recipient. A contribution is deductible for income tax purposes if it is made to a qualified charity, as defined by IRC Sec. 170(c).
The IRS has an online search tool for finding organizations that are eligible to receive deductible contributions. You can access the tool at https://apps.irs.gov/app/eos/. In addition, churches, synagogues, temples, mosques, and government agencies are eligible to receive deductible donations, even if they are not listed in the tool’s database.
But what about the deductibility of donations, with a charitable intent, to an individual?
- Funds raised to support an individual in need are considered personal gifts and don’t qualify as charitable contributions, even when there is a charitable intent. This includes funds given online via GoFundMe or similar sites, funds deposited into a specific bank account established for a sick or injured individual, or an event held to raise money for victims of a tragedy. Many of these efforts are not held by a qualified charity and therefore are not eligible for a charitable contribution deduction.
- Not all GoFundMe donations are for personal needs. Some eligible Section 501(c)(3) charities do use GoFundMe to raise funds for their causes through Certified Charity campaigns. Make sure that a client’s GoFundMe contribution wasn’t made to an eligible institution before you conclude it’s not deductible.
Be aware of the gift tax rules – and their exceptions
Donations made to a personal GoFundMe account are generally considered to be personal gifts, which are subject to gift tax. The general rule is that any gift is a taxable gift and the donor is responsible for paying the gift tax, but there are exceptions—
- Gifts that are not more than the annual exclusion for the calendar year are not subject to gift tax. The limit in 2021 is $15,000 per donee.
- Tuition or medical expenses that are paid on someone’s behalf are subject to exclusion under IRC Sec. 2503(e). However, these costs must be paid directly to the qualifying educational or medical institution to qualify for the exclusion. This exclusion is in addition to the annual gift tax exclusion and is allowed regardless of the relationship between the donor and the recipient. Any donations made through a crowdfunding site for the payment of tuition or medical expenses would not qualify for this exclusion because they aren’t made directly to the qualifying institution.
Properly report transactions
According to the GoFundMe Help Center site, donations made to a personal GoFundMe account rather than to a certified charity fundraising account are generally considered to be personal gifts. GoFundMe will not issue a tax receipt for a charitable donation unless the donation is made through a designated charity fundraiser account. Receipts for these contributions are issued through PayPal Giving Fund, a non-profit organization.
GoFundMe is an administrative site only and will not report donations as income to recipients at the end of the year or issue any tax documents. Donations through GoFundMe are processed by third-party organizations that are subject to the IRS reporting rules for payment networks.
Payment settlement entities like PayPal must file Form 1099-K for payments made in settlement of reportable payment transactions for each calendar year. This includes reportable payment card or third-party network transactions. These reporting requirements apply to all payment card transactions, but to only those third-party network transactions that exceed $20,000 in gross payments to a single payee and that exceed 200 transactions with that payee.
If your client receives a Form 1099-K from the receipt of crowdfunding donations, it is important to include the income on their applicable income tax return in the year reported to them. The IRS will send a matching notice if the reported income is not properly included on the client’s return. If a notice is issued, the burden of proof will fall on the taxpayer to prove that this income is not taxable. To avoid this problem, individuals should report all GoFundMe proceeds as Other Income and show a separate reduction of this amount with an explanation on the return that the proceeds are a non-taxable gift to the recipient of the Form 1099-K.
For more tax tips for your clients
This article was adapted from the Quickfinder Tax Tips Newsletter , a monthly newsletter that brings you concise, easy-to-understand coverage of the latest essential tax developments including tax law changes, IRS releases, and court decisions, plus timely tax planning strategies that you can use to guide your clients. The Newsletter also includes a monthly calendar of important tax due dates.
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