Fundraising Tax Information
July 18, 2008
In addition to federal tax laws regarding “additional income,” you may be liable for state and local taxes on the earnings from your fundraiser. Even if your organization is classified under 501(c) as federally tax-exempt, you may need to pay other taxes. Laws vary by state and municipality.
When you set up your fundraising account, you should discuss with your bank the tax implications of your fundraiser. Your bank will be able to inform you about the latest policies and tax guidelines, so you can prevent your donors or your organization from assuming an unintended liability.
Donations to Nonprofit Organizations
Most donations to nonprofits or other 501(c) organizations are federally tax-deductible for the donor and untaxable for the organization, provided that the donated funds are used for the predesignated purpose. Donors should get a receipt for their donation for tax purposes. As stated above, state and local taxes may still apply to funds raised by nonprofit or other tax-exempt organizations.
Most nonprofit organizations are funded almost entirely by donations, some or all of which may be the result of fundraising activities. NPOs (nonprofit organizations) usually have accountants who assure that the proper taxes are paid and income is reported. Your accountant can also assist you in setting a goal and a budget for your fundaiser.
Inform Donors of Your Tax Status
You need to make it clear to your donors whether their donations are tax-deductible. Many donors will assume that any money they donate to a fundraiser is tax-deductible. But, in fact, only donations made to nonprofit organizations are tax-deductible. It is mandatory that you inform donors of your tax status before they decide to donate to your fundraiser. If you falsely represent yourself as tax-exempt for fundraising purposes, you will be required to pay back the IRS for your donors’ improper deductions and the associated penalties.
When you accept donations to your fundraiser, as noted above you must inform donors of applicable taxes, including gift taxes. In general, a gift is defined by the IRS as any money or item of monetary value that changes hands and is not repaid in kind. In general, any IRS-defined gift valued over $12,000 is subject to the gift tax. Thus, donors should be warned that any gift over this amount will be taxable.
Although donations made to nonprofit organizations are usually not subject to a gift tax, donations to personal or for-profit business use can be subject to a gift tax, which may be payable by the gift recipient. Gifts, including financial donations, made to any entity besides a nonprofit organization are not tax-deductible for the donor, and are taxable for the recipient.
Anytime a gift is made that is not entirely exempt under the annual exclusion limit ($12,000), it is subject to a gift tax and the donor is required to file a gift tax return.
The gift tax does not apply to gifts under a certain dollar amount, called annual exclusions, which, as of 2008, was $12,000 per individual. The annual exclusion applies on an individual basis, so married couples are permitted to give double that amount jointly, or $24,000 per year.
Although, technically, the giver of a gift is required to file a gift tax return and pay any taxes associated with a gift, as a fundraiser you may be liable for any taxes that are unpaid by your donors. In general, it is easier to limit individual donations to whatever the annual exclusion is for that year.
Other Exclusions from the Gift Tax
As of 2008, there are other exclusions that may prevent donors from having to pay a gift tax.
- Individuals are permitted to gift a lifetime total of $1,000,000, in increments no larger than the annual exclusion, without paying a gift tax.
- Individuals are permitted to directly pay medical or education expenses for another person, in any amount, without paying a gift tax. If the funds are not transferred directly to the medical or educational organization, they are subject to annual exclusions and gift taxes.
- Individuals are permitted to make unlimited, untaxable gifts to their spouses also living in the US, even exceeding the annual exclusion. If the recipient of the gift is living outside the US, annual exclusions may apply.