Crowdsourcing has become a ubiquitous method to raise money for individuals, organizations or causes.
It has transformed how we give to others both during tragic events and in the face of ongoing needs.
Websites such as GoFundMe and Indiegogo, with the help of social media giants, tap into networks of millions of people willing and able to donate to a vast number of causes. The intent of these websites, and their campaigns, is well-defined, but the applicable tax consequences and guidance can be less clear.
Crowdfunding Campaigns – When is a Donation Deductible or Reportable?
After the destruction caused by Hurricane Harvey in 2017, people had numerous options to donate to crowdfunding campaigns that distributed funds to individuals and to organizations. Public support was so strong that within five days of the disaster, 850 campaigns on GoFundMe alone brought in more than $4.5 million, according to Time Magazine.
Income Tax Deductibility
Even though all the campaigns related to Harvey were intended to provide relief to victims of the disaster, not all of the donations may have qualified for the income tax charitable deduction.
In the case of any campaign that is soliciting funds on behalf of a qualified charitable organization (described under 501(c)(3) of the U.S. tax code), your contribution to such campaign may qualify for the income tax charitable deduction. This result is the same even if the campaign is created or sponsored by the charitable organization on behalf of an individual or a particular family — as long as the charity has the ultimate discretion regarding the use of the funds.
This is not the case when you give directly to individuals or families. Though you can make gifts directly to the victims of disaster or hardship, this type of assistance does not qualify as a tax-deductible contribution since a qualified charitable organization is not the recipient. However, the individual recipient should not have any income tax consequences, as gifts are generally not subject to federal income tax. Additionally, special tax considerations are granted for qualified disaster relief payments to those in need.
Gift Tax Consequences of Gifts to Individuals
Any donation you make to a qualified charity will qualify for the unlimited gift tax charitable deduction. There are no gift tax reporting requirements relating to such donations.
Donations to individuals may qualify for the gift tax annual exclusion. For 2018 and 2019, this amount is $15,000. Additionally, you may pay unlimited amounts directly to educational institutions or to medical providers for certain expenses on the individual’s behalf. If the donation to the campaign on behalf of an individual is equal to or less than $15,000 (and you have made no other gifts to such individual during the year), the donation would qualify for the gift tax annual exclusion and there would be no gift tax reporting requirements relating to such donation.
If a donation is in excess of the gift tax annual exclusion, a gift tax return must be filed. No gift tax will be owed unless an individual’s lifetime gift tax exemption has been fully utilized.
Verification and Recordkeeping
If it is unclear whether the campaign you are donating to is created or sponsored by a qualified charity, check with your accountant or your advisor to see if your donation will qualify for the income tax deduction. You should receive a confirmation email from the site about your donation. In case you do not, take a screenshot or print your donation page, and your accountant can help you determine the eligibility for the deduction.
And, as you should for all charitable contributions, ensure you keep any receipt you receive from the organization about your donation.