Dear Nonprofiteer, What about gifts to individuals?

Dear Nonprofiteer,

If I want to have a Benefit event for my mother battling cancer, what are the rules and laws affecting those who want to donate?

Signed, Beginning Charity at Home

Dear Charity,

I’m sorry to hear of your mother’s illness, and of your need to provide for her care through charity. While there’s nothing to prevent donors from giving money directly to individuals, unfortunately the Internal Revenue Service is quite clear that such gifts are not tax-deductible. Only donations to “qualifying charities” provide the tax benefit we’re accustomed to when we give to charity.

IRS Publication 526, which is the deductibility “Bible,” devotes all of page 6 to the subject, and explains,

• There are some contributions you cannot deduct. There are others you can deduct only part of. You cannot deduct as a charitable contribution:

1. A contribution to a specific individual,

and goes on to add:

Contributions to Individuals

You cannot deduct contributions to specific individuals, including the following. . . .

• Payments to a hospital that are for a specific patient’s care or for services for a specific patient. You cannot deduct these payments even if the hospital is operated by a city, state, or other qualified organization.

Nor can you create a “qualified organization” to fund your mother’s care: nonprofits have to be operated for a “public purpose” and specifically can’t benefit or profit a specific individual. While you’ll occasionally run across a lawyer who will suggest that s/he can finesse this so as to create a qualifying charity that actually benefits a single individual, all the hair goes up on the back of the Nonprofiteer’s neck at such a claim.

So you’re NOT a nonprofit, and gifts to you and your mother AREN’T deductible. That doesn’t make gifts to you prohibited–just less beneficial to the donors. Make sure any invitation you create for your benefit event makes this clear. Mere silence on the subject is probably insufficient: there’s no reason for most people to know the relevant law.

Though you’re not going to be issuing tax receipts, you’ll want to keep careful track of the funds you receive and keep them separate from the rest of your finances. Go to your local bank and ask if you can create a checking account specifically for this purpose, and then ask your donors to write checks to the Jane Y. Doe Health Care Fund. This will make clear to them that you’re not mingling their donations for your mother’s care with your own finances, and that therefore their money will go directly to health care costs and not get diverted to your grocery bill. This will help encourage them to give.

My best wishes for her recovery and your success in raising money to support it.

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6 Responses to “Dear Nonprofiteer, What about gifts to individuals?”

  1. Anita Bernstein Says:

    What the writer proposes is something like a trust fund for the education of a child whose parent(s) died an untimely death. Legally it’s similar to what the writer wants to set up–gifts are not deductible; the trust is not a nonprofit–and because it’s more commonly done, the writer might look into that variation (on the Internet etc.) to learn about others’ experiences.

  2. Nichols Says:

    Money that is received and tracked through the bank, do you pay taxes on this money? If so, what is the percent?

    • Nonprofiteer Says:

      I don’t quite understand the question: if you mean, do individuals pay taxes on money they receive as charity, the answer is “Yes,” unless their total income is too low to be taxed. Likewise, the percentage of tax paid depends on total income: people with higher incomes pay a higher percentage of their incomes in tax.

      If the question is whether nonprofits pay taxes on their donations, the answer is “no”–nonprofits are exempt from income taxes on donations. They must, however, report them to the Internal Revenue Service on a Form 990, so the IRS can keep track of the flow of money into the charitable sector.

  3. Jane Says:

    Hello. What rules govern the websites that provide a free useful service to people but also have a paypal donate button on their page to keep the service free?

    If that person’s paypal is linked up to it, does not mean that the donations (if any) cannot exceed the IRS annual exclusion amount of $13,000? – or – should that person try to register the website as a non profit?

    Thank you so much for the help. I can’t figure this out.

  4. Nonprofiteer Says:

    This is such a good question that it’s become a “Dear Nonprofiteer” letter of its own. Please see the July 28 post.

  5. Dear Nonprofiteer, Are voluntary Internet payments “contributions” for tax purposes? « The Nonprofiteer Says:

    […] meaning an agency with a public purpose governed by a Board of Directors.  As in the case of “What about gifts to individuals?”, the Nonprofiteer stresses that nonprofit status is not camouflage for other economic arrangements; […]

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