Are Crowdfunding Donations Tax Deductible?
Can you catch a tax break for donating to a crowdfunding site? Maybe
Crowdfunding lets you help those in need with absolute ease and minimal fuss. Click your mouse, tap your phone, and send money off to someone who needs it—at least if the website campaign is to be believed. It doesn’t have to be cash debited from your bank account, as PayPal and credit cards work, too.
You can claim a tax deduction for making charitable donations, though it may be subject to many 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. So you donate $50 to the appropriate account through the crowdfunding website.
That family or up-and-coming entrepreneur won’t receive the full $50. The site will deduct a processing fee first. GoFundMe’s payment processing fee is 2.9%, plus an additional $0.30 per donation.
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 then claim a tax deduction for it, whether or not you gave that $50 directly to your neighbor or through a crowdfunding site. The Internal Revenue Service (IRS) says this is a gift, not a donation.
Other donations that are not considered charitable donations for tax purposes include funds given to political parties, foreign organizations and governments, labor unions, social clubs, and for-profit hospitals and schools.
You can claim a tax deduction for some contributions made through crowdfunding platforms if your donation is to a certified charity, officially registered with and recognized by the government, and regulated by federal or state law. In other words, it must be a 501(c)(3) organization.
Crowdfunding sites are naturally well aware of this hitch, and some, including GoFundMe, have taken steps to help you out. They identify the campaigns on their websites qualifying 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 this extra mile will usually note that the organization is a qualified charity in some fashion.
The IRS offers a tax-exempt organization search tool. If the crowdfunding campaign organizer’s name is here, it’s tax-exempt and you’re good to claim a deduction. Otherwise, you can’t claim a tax deduction for your donation.
You Must Itemize to Claim the Deduction
Assuming 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 your tax return to claim a deduction for charitable giving in the year you donated. This means completing Schedule A with your tax return.
As a part of the CARES Act passed in the wake of the COVID-19 pandemic, Congress temporarily changed the rules regarding charitable donations. For tax year 2020 (the taxes you'll file in 2021), anyone can claim a deduction of up to $300 for cash contributions to qualifying organizations. Therefore, you can claim both the standard deduction for tax year 2020 as well as a $300 deduction for charitable giving. Barring further legislation, this deduction will not be available for taxpayers who claim the standard deduction in tax year 2021.
If you choose to itemize your taxes, that means you'll have to forego the standard tax deduction for your filing status. Many taxpayers find that when they add up all their qualifying itemized deductions—not just for charitable giving but for things like state and local taxes and medical expenses as well—the total is less than the standard deduction.
Check the chart below to learn standard deduction amounts for tax years 2020 and 2021.
|Single, Married Filing Separately||Married Filing Jointly||Heads of Household|
For example, if you file in 2020 as a single taxpayer and claim a total of $10,000 for your itemized deductions, you’d end up paying taxes on $2,400 more in income than you'd need to.
Even giving thousands, your donation might not count toward your itemized deduction total. The IRC limits most deductions for donations to no more than 60% of your adjusted gross income (AGI), along with other possible limits, such as if you expect to receive state or local tax credit for your contribution. If you received anything of value in exchange for your giving, you must deduct its value from your claimed deduction.
It’s a good idea to keep receipts to confirm any charitable donations. In fact, you must do so (and charities must provide you with a receipt) if you donate more than $250.
Your AGI is what’s left after you take certain adjustments to income, and can be found on line 7 on your form 1040 tax return. For example, if your AGI is $50,000 and you donated $35,000, you’re limited to claiming a deduction on 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 be responsible for 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). In tax years 2020 and 2021, the IRS allows you to give away up to $15,000 per gift recipient per year without incurring the tax. Keep in mind that the $15,000 annual exemption increases to $30,000 if you are married and file a joint return. You and your spouse each can claim a $15,000 exemption in this case.
The donor pays the gift tax, not the recipient. In other words, you would owe the gift tax on $10 if you were generous and donated $15,010 to one charity. The tax rates for gifts in excess of $15,000 range from 10% (on amounts over $15,000 by $10,000 or less) to 40% (on amounts over $15,000 by $1 million or more).
You don’t have to pay the gift tax on any donation you give to a crowdfunding campaign that’s run by a qualified charity.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.