As Americans absorb agonizing reports about Hamas’ brutal terrorist attacks on Israeli civilians and Israel’s bombing of Gaza in retaliation, many may want to give to help those suffering.
Giving money in times like these can be tricky since, in addition to making sure your dollars are used wisely and get where you intended for them to go, there may be tax and other legal considerations. Here’s what you need to know.
If you want to receive a tax deduction for your contribution, your donation must be made to a qualified organization. Those generally include religious organizations like churches, synagogues, temples, and mosques in the U.S., as well as domestic nonprofit schools and hospitals. It also includes what we typically think of as charitable organizations like the American Red Cross and the United Way.
You should check out the credentials of a potential charitable organization before you donate. An easy way to check charitable status is to click over to the Tax Exempt Organization Search Tool on the IRS website or call the IRS (toll-free) at 1.877.829.5500. Keep in mind that churches, synagogues, temples, and mosques in the U.S. are considered de facto charitable organizations and are eligible to receive deductible donations even if they’re not on the list (some exceptions apply, so be sure and ask if you’re not sure).
You are typically not allowed to claim a tax deduction for your contribution to a non-U.S.-based charitable organization. That’s made clear in the tax code under section 170(c)(2)(A), which provides that if a charitable contribution is to be deductible, it must be made to an organization “created or organized in the United States or in any possession thereof, or under the law of the United States, any state, the District of Columbia, or any possession of the United States.”
You may still donate to non-U.S.-based charitable organizations. However, those donations are not considered tax-deductible charitable contributions—even if they are made to charitable organizations in the country where services are being performed.
Think beyond tax limitations. You should be aware that non-tax rules may apply when sending money abroad to certain individuals or countries (including those subject to sanctions or on the Specially Designated Nationals and Blocked Persons list). Penalties for breaking the rules, even accidentally, can be severe. If you’re not sure, it’s always best to consult with a tax or legal professional before you give.
Consider U.S. charities with long arms. One way to provide aid in a foreign country while still qualifying for a deduction—and to ensure that you’re following those non-tax rules—is to donate to U.S.-based organizations that assist individuals in foreign countries. Donations to those U.S.-based organizations, such as the Red Cross, will normally qualify for charitable deductions even if they are providing services in foreign countries so long as they otherwise meet the rules as domestic tax-exempt charities.
Be wary of work-arounds. Some U.S.-based charitable organizations may solicit donations with the intention of turning those funds over to a foreign charity. You’ll often see these organizations referred to as a “Friends Of” charity. Those organizations must meet specific criteria, including having their own charitable mission and absolute discretion over donated funds—a group that functions simply as a conduit to funnel funds to a foreign charity won’t qualify. If those organizations follow the rules and have tax-exempt status in the U.S., contributions will generally be tax-deductible.
Take a look at intermediaries. In some instances, taxpayers can rely on intermediaries to make tax-deductible charitable gifts to foreign organizations. An easy way to do that is to contribute to a donor-advised fund, or DAF. DAFs are giving accounts established at public charities. When you donate to a donor-advised fund, you are generally eligible to take an immediate tax deduction even if the funds aren’t immediately turned over to charity. The funds are typically invested, and you can make grant recommendations to any qualified public charity. While most DAFs focus on U.S.-based charitable giving, some have partnered with an intermediary organization registered as a U.S.-based charity to allow giving to charitable causes abroad. It’s important to do your homework and stick to reputable organizations—the IRS warns that promoters have established donor-advised funds “for the purpose of generating questionable charitable deductions.”
Exceptions exist. There are some statutory exceptions to the U.S.-based charitable organization rule, including those for charitable organizations in Canada, Mexico, and Israel. For example, under the U.S.–Israel income tax treaty, a contribution to an Israeli charitable organization is deductible if and to the extent the contribution would have been treated as a charitable contribution if the organization had been created or organized under U.S. law. More importantly, to deduct your contribution to an Israeli charity, you must have income from sources in Israel—that deduction is also limited to 25% of your adjusted gross income, or AGI, from Israeli sources.
More Charitable Giving Tips
Here are a few more rules that apply to charitable gifts:
Itemize. You must itemize your deductions on Schedule A to take a charitable contribution deduction. The temporary deduction for charitable cash contributions for taxpayers who do not itemize their tax returns has expired and is no longer available.
Donations must be made to qualifying organizations to be deductible. You cannot deduct contributions to specific individuals, no matter how deserving.
Get a receipt. Cash donations, no matter the amount, must be substantiated by a bank record such as a canceled check or credit card receipt, clearly annotated with the name of the charity or in writing from the organization. The writing must include the date, the amount, and the organization that received the donation. You can claim a deduction for a contribution of $250 or more only if you have an acknowledgment of your gift from the qualified organization.
Pay attention to the value of any donor incentives. A charitable donation is deductible only to the extent that the donation exceeds the value of any goods or services received in exchange. If you make a donation and receive something in exchange—anything from a coffee mug to a complimentary magazine subscription—you can only deduct the cost of your donation less the value of the item received. If you’re not sure of the value of an item or service received after a donation, ask. Most charitable organizations will do the math for you and document the value of your donation on their thank you letter or receipt.
Consider donating appreciated assets. Donating property that has appreciated in value, like stock, can result in a double benefit. Not only can you deduct the property’s fair market value (so long as you’ve owned it for at least one year), but you will also avoid paying capital gains tax. Normally, appreciated assets are subject to capital gains tax at disposition, whether by selling or gifting, but there’s an exception for donations to charitable organizations.
Limits may apply. The amount you can deduct for charitable contributions is generally limited to no more than 60% of your AGI. Your deduction may be further limited to 50%, 30%, or 20% of your AGI, depending on the type of property you give and the type of organization you give it to. The temporary 100% limit available for 2020 and 2021 for qualified cash contributions no longer applies.
Contributions are tax-deductible in the year they are made. That means that to make your gifts count during the tax year, they should must be made by December 31. Contributions made by text message are deductible in the year you send the text message if the contribution is charged to your telephone or wireless account. Credit card charges—even if they’re not paid off before the end of the year—are deductible so long as the amount is captured by year-end. Similarly, checks written and mailed by the end of the year will be deductible for this year even if they aren’t cashed in 2023. And, good intentions don’t count: making announcements that you intend to donate assets will not qualify for a deduction in the current tax year unless you make good on the pledge during the year.
Ask For Help
Other rules and restrictions may apply. If you have questions about the deductibility of a contribution, the legitimacy of an organization or donor arrangement, or whether you can send money or other assets abroad, check with your tax or legal professional.
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