Recently, a client contacted me to help them better understand how charitable deductions work, and how a potential giver might be impacted if they gave to a GoFundMe instead of a 501(c)3 organization.
This person is part of a group sponsoring a family from Ukraine to escape the war. The funds raised through GoFundMe would directly help this Ukrainian family settle in Minnesota, but the financial gift would not qualify as a charitable deduction. Whereas if a person gave to the sponsoring organization, their gift would be eligible for a charitable deduction, but the funds would not make their way directly to the family. Dilemma!
The following is my response and will explain the potential differences between these giving types. Spoiler alert – giving directly to a GoFundMe versus a charity might not make any difference to your taxes. It all depends.
What a wonderful thing you are doing!
You ask a good question. Resulting from the Tax Cuts and Jobs Act in 2018, the standard deduction was raised resulting in many more people using the standard deduction instead of itemized deductions. If a person files their taxes with a standard deduction, they lose nothing at all to donate directly to your GoFundMe project rather than to Alight, the 501 (c)3 organization, directly. That is because gifts to charity do not impact their tax return if they use the standard deduction.
For married people, it can be hard to have enough deductions to get higher than the standard deduction, which is set at $27,700 in 20231. For single people, it’s easier as their deduction is set at $13,8501. One reason it’s harder for married returns is that congress capped the amount of state taxes we can deduct on our federal return to $10,000. That includes both state income tax and property tax and is the same number for both married and single filers!
So if a single person earns $75,000 and pays 7% state tax, their income tax may be $4,280. (These are not accurate numbers, just hypothetical). Then if their property tax is $6,000, they will take the full $10,000 state tax deduction. Now they are only $3,850 away from being able to itemize deductions. They can also deduct mortgage interest. Let’s say they have a $200,000 mortgage and paid $8,000 in interest. Now their itemized deductions are $18,000 and they have blown way past the $13,850 standard deduction limit. Therefore, every charitable donation will have a tax reducing impact to them. The impact is dependent on what tax bracket they are in, how many kids they have, deductions, and credits. It would be quite possible for this hypothetical single person to be in the 22% federal and 7% state tax brackets. A $2,000 charitable gift would save them 29% in taxes – or $580. Many people might consider that significant.
Let’s take that same example and make them a married couple, earning $75,000. If they had enough deductions to get above the standard deduction of $27,700, they could be in the 12% federal tax bracket and 7% state which makes their charitable tax deduction only 19%. On a $2,000 charitable gift their deduction would be $380.
It is very possible that a married couple would not have enough deductions to itemize. Using the same example, if the deductible state taxes were $10,000 and mortgage interest is $8,000, they still need $9,700 in other deductions to itemize instead of taking the standard $27,700 deduction. This could be in the form of medical expenses. But to itemize medical expenses, the expenses must be more than 7.5% of their adjusted gross income. Because of this hurdle, many people do not itemize medical expenses. Charitable giving can also be itemized, but the next $9,700 of giving won’t have a tax-reducing impact because they are still below the standard deduction. (Not to mention that this would mean giving more than 10% of their income – probably difficult to do).
Bottom line: if a person/couple does not have deductions that are higher than the standard deduction, then their charitable gifts will not have a tax-reducing impact. Forbes reports that 90% of the U.S. population takes the standard deduction. That bodes well for your GoFundMe project since there is no loss for 90% of the taxpayers to use the GoFundMe to help the Ukrainian family.
Giving to a 501(c)(3) organization can be a great way to reduce your tax burden, while giving to a GoFundMe campaign may be a more personal and direct way to support a cause or help someone in need. When deciding which option to choose, it's important to consider your financial goals and priorities, your tax situation, and the reputation and values of the organization you're considering supporting.
1Source: Nerd Wallet, https://www.nerdwallet.com/article/taxes/standard-deduction#:~:text=If%20you%20want%20to%20get,%2420%2C800%20for%20heads%20of%20household. Accessed 3/9/23