Year End Tax Planning: Making Charitable Contributions if You are an American Abroad

Many Americans living and working overseas are involved in charitable causes. The question often arises whether US expats living abroad can obtain the tax benefit for a charitable contribution deduction? The answer depends on various factors, including those discussed below.

Where is the Charity Organized or Created?

The mere fact that a US taxpayer is living abroad will not prevent the taking of a charitable deduction on the tax return. The more critical consideration involves where the charity is created to which he is making the contribution.  Under the US tax laws governing charitable deductions, the organization must be “created or organized in the United States or in any possession thereof, or under the laws of the United States, any State, the District of Columbia, or any possession of the United States.” This is a strict requirement so that, unless otherwise excepted, contributions by individuals to a charity created or organized under the laws of a foreign country are not deductible for income tax purposes.  Exceptions may exist, however, pursuant to a relevant US tax treaty.  For example, a taxpayer may be eligible for a deduction on contributions made to Canadian or Mexican charities if he earns income from sources in Canada or Mexico, respectively. See e.g., Article 22 Section 2(b) of the US-Mexico Income Tax Treaty.

Is the Charity IRS-Approved?

In addition, the charity must be an IRS approved tax exempt organization.  The IRS maintains a search tool on its website enabling a taxpayer to check if the organization is on the IRS list.  A list of all IRS approved charitable organizations can be found here.  Often foreign charities lacking a presence in the US are not IRS approved.

If, however, you make a donation to a charitable organization based in the US and that organization itself both transfers the funds to a foreign charity and controls the use of the funds, the contribution will be tax deductible. Similarly, a contribution may be deductible if you make a donation to an organization with a foreign address that is an administrative arm of a US-based charity.  The relevant Treasury Regulations specifically provide that a “charitable deduction by an individual to a [US charitable organization] is deductible even though all, or some portion, of the funds of the organization may be used in foreign countries for charitable or educational purposes.”

Revenue Ruling 63-252 made clear that the limitation on location of the charitable organization “relates only to the place of creation of the charitable organization to which contributions may be made and does not restrict the area in which deductible contributions may be used.”  However, “special earmarking” of the use or destination of funds paid to a qualifying charitable organization may result in disallowance of a deduction.  The contributions cannot be earmarked for use in a foreign country and the contributions must be subject to control by the domestic charitable organization in furtherance of its functions and charitable purposes.  The IRS has written an informative article on this particular topic.

Is the Taxpayer Itemizing Deductions?

Second, the taxpayer must itemize deductions on his tax return in order to receive tax benefits.  Taxpayers using the standard deduction are not entitled to any charitable contribution deduction.  Those filing tax returns for 2018 may be disappointed to find that they can no longer deduct their charitable gifts on their tax return. This is simply because of changes brought in by the tax law commonly called the Tax Cuts and Jobs Act (TCJA). TCJA nearly doubled the standard deduction, thereby sharply reducing the number of filers who itemize deductions on their tax returns.

The standard deduction amounts for 2019 are below:

  • Single or married filing separately: $12,200
  • Married filing jointly: $24,400
  • Head of household: $18,350

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,300 for each married taxpayer or $1,650 for unmarried taxpayers.

Prior to the enactment of TCJA, 20 percent of filers took a charitable deduction, reports the Tax Policy Center; now, only 8 percent are expected to.  While taxpayers are not paying more in taxes as a result of the law change, the tax law is not giving any credit for charitable generosity.  As a result, this may reduce the amount of charitable gifts that are ultimately made.

The deduction for charitable contributions generally cannot be more than 60% of the taxpayer’s adjusted gross income. However, the deduction may be further limited to 50%, 30%, or 20% of adjusted gross income, depending on the type of property given and the type of organization to which the donation is made.

Is There Taxable Income?

It must be remembered that charitable contributions will provide a tax benefit only if the taxpayer has taxable income which the contribution can offset.   Many expats abroad do not have taxable income after taking into account the foreign earned income and housing exclusions and/or foreign tax credits.

A contribution is deductible in the year it is made, so the taxpayer should examine if he will have taxable income in a given year.  If he will not, he might consider delaying the contribution to the next year, for example, if he expects a larger bonus in that later year.

Gifts must be made by December 31 of the year for which the deduction will be claimed.  It is not required, however, that cash leave your account. Credit card charges are deductible charitable contributions so long as the charge is actually captured by the end of the year even if the charges are not paid off before the end of the year.   Similarly, checks which are written and mailed to the charitable organization by the end of the year (e.g., 2019) will be deductible for that year even if they are not cashed until the following year (e.g., 2020).

Proper Substantiation and Records?

Different rules apply for different types of donations. For example, a taxpayer cannot deduct the value of time or services. Cash deductions, regardless of the amount, must be substantiated by a bank record, such as a canceled check, a bank or credit union statement or a credit card receipt.  A receipt or written acknowledgment from the charitable organization will also suffice if it includes the name of the charity, the date and amount of the contribution.  A taxpayer can only deduct the fair market value of donated goods and proper recordkeeping is required, with the rules varying depending on the dollar value of the contribution. Fair market value and record keeping requirements are explained in detail by the IRS. Taxpayers should review IRS Publication 526 for full information about taking tax deductions for their charitable contributions.

Posted October 24, 2019

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