Maximizing Donations to Foreign-Based Charities under Tax Reform UPDATED by Lewis Kevelson, CPA
Posted on October 08, 2019
Donations that U.S. taxpayers make directly to foreign charities usually will not qualify for income tax deductions unless those charities are registered with the IRS as tax-exempt entities or there is relief available under a bilateral income tax treaty. In the rare instances when these conditions are met, the charitable deduction is available only to those taxpayers who itemize their deductions, meaning that their deductible expenses exceed the new, higher standard deduction, which for 2019 is $12,200 for individuals or $24,400 for married couples filing jointly.
With that said, it is safe to assume that most philanthropic-minded families are altruistic and will continue to give to those in need regardless of whether or not they receive a tax break in return for their generosity. Yet, savvy donors do have a few options for continuing to support both U.S. and foreign charities and even reaping greater tax benefits under the new law.
Before making any donations within or outside the U.S., take the time to investigate the target organization, determine whether your contributions will be allocated as intended, and ensure your dollars will not support organizations that are counter to the interests of the U.S. Websites, such as Charity Navigator and GuideStar, are excellent sources to begin your research. If the U.S. recognizes the organization as a section 501(c)(3) tax-exempt charity and you can itemize your deductions, the amount of your deduction for tax years 2018 through 2025 increases to 60 percent of adjusted gross income (AGI) while keeping the current deduction for gifts of appreciated assets at 30 percent of AGI.
Conversely, if you are a U.S. taxpayer and you intend to direct your giving to organizations outside the U.S., or you do not qualify to itemize expenses and claim a charitable deduction, there are two strategies you should consider.
A donor-advised fund (DAF) is a charitable-giving tool sponsored by a U.S. 501(c)(3) that allows individuals to qualify for a tax deduction when they donate to nonprofits whose philanthropic missions include assisting approved foreign charities. The donor making a cash contribution to a U.S.-approved DAF can take a tax deduction of up to 60 percent in the year of funding the DAF and direct which charities it recommends to receive grants from the DAF over time. Donations of long-held appreciated assets, including real estate, publicly traded securities, and/or interest in certain family businesses, can qualify for an annual deduction of 30 percent of AGI and potentially avoid capital gains tax on the appreciation of the asset. When DAF contributions surpass IRS limits, taxpayers may carry the deduction forward five years.
A DAF has the advantages of being easy to implement by allowing donors to use the sponsoring charity’s platform with little or no added cost to the donor. However, one downside to the DAF is that unless the U.S.-sponsoring nonprofit has already vetted a specific foreign charity, there is some degree of uncertainty as to whether or not a donor’s funds will reach the intended organization.
To gain more control over the foreign-charity selection process, a donor may instead establish a U.S. private foundation (PF), which is a separate legal entity formed for the purpose of philanthropic activity. Once established in accordance with IRS guidelines, the PF can receive deductible donations (usually from the individual, family or business that formed the PF) and then make grants to specific foreign charities identified by the donors. Contributions to private foundations can provide taxpayers with deductions of up to 30 percent of AGI for cash gifts or 20 percent of AGI for appreciated assets.
These types of non-cash donations to DAFs or private charitable foundations also provide taxpayers with the ability to reduce or eliminate their exposure to capital gains tax on the appreciation of those assets while also giving a much larger gift to charity. When DAF contributions surpass the IRS limits, taxpayers may carry the deduction forward five years.
Private foundations must take certain due diligence steps to ensure that the foreign charities they select to receive grants are equivalent to U.S. public charities (known as equivalency determination) and therefore eligible for PF grants. Under a simplified procedure, a PF may qualify for the foreign charity equivalency determination test by obtaining written advice from a tax-qualified practitioner who can make a good faith determination that a foreign grantee would likely qualify as a public charity under U.S. guidelines. Alternatively, PFs that sponsor specific projects in foreign countries may seek IRS approval by conducting thorough pre-grant due diligence of the project to document the charitable purpose of the grant and commit to continue monitoring and reporting to the IRS on the project’s activities and responsible use of its funds.
Private foundations meet the long-term philanthropic goals and needs of individuals and families. Although they provide a higher level of control over the charity selection, there are annual administration and compliance costs to meet IRS requirements.
There are numerous ways that U.S. taxpayers can give generously to those in need in foreign countries, where, perhaps they were born or where they have strong family ties. The professional advisors and accountants with Berkowitz Pollack Brant work closely with domestic and international individuals, families and businesses to design gift giving opportunities to U.S. and foreign- based charities.
About the Author: Lewis Kevelson, CPA, is a director with Berkowitz Pollack Brant’s International Tax practice, where he assists cross-border families and their advisors with personal financial planning and wealth management decisions. He can be reached in the firm’s West Palm Beach, Fla., office at (561) 361-2050 or via email at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.