There are times in our lives where unexpected accidents or emergencies come up and our normal income and savings just will not cover everything. We can ask friends and family for assistance, but even that might not cover everything. Thanks to the internet, there are donation services that allow us to make a case for help from total strangers, tapping the reserve of empathy and charity of others in order to make ends meet. But even though money received from online donation services are donations, you may be responsible for taxes on that money.
Donations to charities are considered tax-exempt because they are made to organizations who have been designated by the government as charities. They have filed special paperwork that allows them to receive money and not pay taxes on it. You, as a private citizen, are not a charitable organization, and thus are required to obey any and all federal and state tax laws.
However, donations collected through donation services may be considered gifts. Gifts, in the eyes of the IRS, are not taxable because the recipient does not provide something in return to the giver. The size of the gift also comes into play when dealing with taxes. Any gifts over $14,000 are considered taxable, but the recipient does not pay them. The giver of the gift must pay what is called a gift tax.
Gift taxes can be complicated. It all comes down to who is giving the gift. An individual can give a gift of $14,000 without paying a gift tax. However, if a couple gives the gift from a joint account, they can give up to $28,000. The IRS considers the couple as being able to give $14,000 individually. The couple can give one in-law from two different other couples up to $14,000, making the annual limit of a couple giving a gift to $56,000 without paying a gift tax.
There are exceptions to gift taxes. A person giving their spouse money is not considered taxable for any amount of money. The catch is that both spouses must be U.S. citizens. If the spouse is not a citizen, special rules apply. If the gift is directly paid to a medical or educational institution, such as for paying medical bills and tuition costs, then it is not taxable.
Crowdfunding has opened up a whole new way for people to raise money for a variety of things, from starting a business to a creative endeavor. If donations are made in these conditions, the money is taxable because the person receiving the donations is providing a product or service in return for the money. Most donation sites specifically consider money donated for an emergency or problem in time of need as a gift.
There have been cases where large sums of money were collected through donation sites that were taxable. For instance, if a person sets up a donation site for another person, the money could be taxed if the person who set up the site, collects many donations and gives it all to the recipient. Remember, individuals are only allowed to give $14,000 as a gift without it being taxed. If the recipient of the money had set up the site, then taxes can be avoided, as the money is going straight to the person it is intended to help. Also, it is within the tax rules for donation pages that get over $20,000 to be issued a tax form.
There are issues for the donors as well as the recipients. Donations made on crowdfunding sites are not tax deductible. They are considered gifts and not donations, and therefore are not eligible to be deducted. In order for donations to be deductible, they must have been given to a charitable organization with the proper designation.
If you are unsure of what your tax responsibilities are when it comes to crowdfunding donations, consult a tax professional. Crowdfunding is still a very new phenomenon, and accountants and the IRS are still ironing out the legal details of receiving crowdfunding.
There are other situations where donations can be collected. If your employer gives you a bonus at Christmas, it is considered taxable income even though the gesture can be seen as a gift. However, if the bonus was small, such as them buying you lunch or giving you a small physical gift, there is no need to report it.
Another area where donations can be taxed is for political campaigns. If you choose to run for office, there are special rules applied to any money given to you for your campaign. Any money given to you for your campaign must be spent on the campaign, or saved for future campaigns. Any donated money that is used for anything else other than the campaign is considered taxable income.
If you are a campaign contributor, there are tax issues involved there as well. The IRS strictly forbids any campaign contributions from being deducted from your federal taxes. However, at the state level, the rules are a little different. Four states: Oregon, Virginia, Arkansas, and Ohio, all allow you to claim campaign donations on your state taxes up to a certain amount. This is to encourage citizens to participate in the democratic process, but there are many controversies surrounding the practice. Opponents of the practice claim the credits cost states tax revenue.
Whether you are running for office or just need a little hand to get by, charitable donations to individuals have stepped into a new, confusing era. The IRS has yet to catch up with these new trends, and accountants are not fully prepared to handle the paperwork involving crowdfunding. The increased use of donation sites will prompt swift legal changes and the community of crowdfunders will experience some growing pains. Still, the use of the sites is a great way to help people in need who have no other alternative. Whether the money was given to help someone pay a medical bill, start their own small business, or write a book, donating to individuals is always a good investment.