You can claim a tax deduction for making charitable donations, but it can be subject to several rules. Unfortunately, these rules prevent many crowdfunding donations from qualifying.
Crowdfunding and Charitable Donations
You’ve most likely heard of the sites, even if you’ve never donated before: GoFundMe, Kickstarter, Crowdfunder, and numerous others. Maybe a family faces dire financial trouble due to some unforeseen catastrophe, or someone is trying to raise money to create an amazing new gadget that will save the world. You donate $50 to the appropriate account through a crowdfunding website. The most restrictive charitable donations rule in the Internal Revenue Code (IRC) covers whom you can give money to if you want to claim a tax deduction for your generosity. Unfortunately, gifts to individuals don’t qualify. You can’t give $50 to your down-on-his-luck neighbor and claim a tax deduction for it, regardless of whether you gave that $50 to them directly or through a crowdfunding site. The IRS calls that a gift, not a donation. Other donations that are not considered charitable giving for tax purposes include funds to political parties, foreign organizations and governments, labor unions, social clubs, and for-profit hospitals and schools.
IRS-Approved Charities
You can claim a tax deduction for some contributions made through crowdfunding platforms if your donation is to a certified charity. It must be officially registered with and recognized by the government and regulated by federal or state law. In tax speak, it must be a “501(c)(3) organization.” Crowdfunding sites are well aware of this hitch, and some, including GoFundMe, have taken steps to help you out under such circumstances. They identify the campaigns on their websites that qualify for a tax deduction because they’re run by 501(c)(3) organizations. You’ll usually see some type of badge or emblem next to the campaign name on the site. Even sites that don’t go that extra mile will usually note that the organization is a qualified charity.
You Must Itemize To Claim the Deduction
Assuming that the crowdfunding campaign you want to give to meets all applicable rules, you’ll have to do a little more work to claim a tax deduction in exchange for your kindness. You must itemize in order to claim a deduction for charitable giving in the year you donated. This requires completing Schedule A with your tax return. You’ll have to forgo the standard tax deduction for your filing status if you itemize. Many taxpayers find that even when they add up all their qualifying itemized deductions (not just for charitable giving but also for things like state and local taxes and medical expenses) the total is less than the standard deduction they’re entitled to claim for their filing status. Check the chart below for the standard deduction amounts for tax years 2022 and 2023. And your donation might not count toward your itemized deduction total even if you give thousands of dollars. The IRC limits most deductions for donations to 60% of your adjusted gross income (AGI), along with other possible limits, such as if you expect to receive a state or local tax credit for your contribution. And you must deduct its value from your claimed deduction if you received anything of value in exchange for your giving. Your AGI is what’s left after you take certain adjustments to income, then you can subtract your itemized deductions or standard deduction from there. If your AGI is $50,000, and you donated $35,000, you’re limited to claiming a deduction for only $30,000 of your donations. As a practical matter, however, most people don’t give away more than 60% of their income.
The Gift Tax Complication
There’s one more equation to calculate. You could end up being responsible for paying the federal gift tax. The IRS considers a “gift” to be a transfer of value (such as cash, stocks, or another asset) to an individual, without expectation of any form of repayment, including services or favors. The IRC allows you to give away up to $16,000 per gift recipient per year without incurring the tax in 2022, increasing to $17,000 in 2023. These exemptions are per person, so they double if you’re married and file a joint return. The donor, not the recipient, pays the gift tax. In other words, you would owe the gift tax on $10 if you were generous and donated $16,010 to one charity. The gift tax ranges from 18% to 40%, depending on the value of the gift you’ve given.
