Have you ever donated money to a good cause, such as emergency health care for an injured person or assistance for someone who has unexpectedly lost a loved one? Have you used a website such as GoFundMe to make your donation? Or even better, have you created, or considered creating, a campaign on such a website to collect money and then distribute the money to the person in need? If so, you may want to know the potential tax consequences and reporting requirements related to your generosity.
Tax consequences to the donor
First of all, as a donor, your contribution is not likely to be deductible from your income as a charitable contribution, as is a contribution to a 501(c)(3) organization, for example. Donations from one individual to another do not qualify as charitable contributions for income tax purposes. Instead, such a donation is characterized as a nondeductible gift to the individual receiving the funds.
While there is a transfer tax that applies to gifts, as I explained here, most individual gifts made to such a campaign are below the annual exclusion amount from gift tax ($14,000 in 2017). If so, as the donor, you would have no reporting requirement or tax consequence for making the gift. If, however, you make a gift in excess of that amount, you are required to file a gift tax return to report the gift along with all others you make during the year.
Tax consequences to the recipient
If you receive funds that are donated out of generosity by others, there is generally no tax consequence to you. In other words, (1) there is no limit to the amount of gifts you may receive, (2) there is no tax on the receipt of a gift, and (3) gifts are not taxable income.
That said, if you use a third-party payment processing website such as GoFundMe to collect donations and distribute them to you, that organization may be required to report your receipts to the IRS and to you on Form 1099-K. Such a payment processor’s threshold to report the receipts, with you as the “payee,” kicks in when $20,000 or more is received, or if 200 or more donations are made. Receiving a Form 1099-K, and knowing that it is reported to the IRS, may be troubling, especially if you don’t expect it. That said, this reporting requirement does not necessarily mean you have received taxable income. Nevertheless, you ultimately may need to explain to the IRS how and why you received the funds. If the receipts were clearly gifts made to you out of generosity, you should have no further issues.
This post assumes that all contributions are being made out of generosity. On the other hand, if you start a campaign to receive funds in exchange for providing services or products to the contributors, the receipts are more than likely income, and you will have to pay taxes on that income.
One other mistake to avoid
If you are generous enough to create a campaign to raise funds for a friend or loved one, it may be best to not to set up the campaign so that it names you as the payee and reports under your Social Security number. Even though your receipt of the gifts is not taxable income, the Form 1099-K, if required, will be reported with you listed as the “payee,” leaving you to explain the situation to the IRS.
Further, after your receipt of all of the funds, you will presumably then have to transfer the money to the person who is the intended recipient. After the funds are collected, you may very well be transferring more than $14,000 to the intended recipient, and in that case you are required to report the gift on a gift tax return. A better approach may be to set up the campaign with the ultimate intended recipient as the payee.
Lastly, if you expect substantial contributions for your cause, or if the ultimate beneficiary is a minor, setting up a trust for the benefit of the ultimate beneficiary rather than giving all of the money to him or her outright may be a good idea. Our Trusts & Estates attorneys can help structure such a trust in the way that best fits your situation.