Are Gifts Earmarked for Specific Individuals Tax-Deductible?

Q: A neighbor’s house recently burned to the ground and I started a GoFundMe page to raise funds to help the family cover living expenses and replace some of their belongings destroyed in the fire. Are the contributions tax-deductible charitable gifts?

A: While certainly an altruistic gesture, donations to help the family recover are not deductible under the Internal Revenue Code. If you are surprised by this answer, you are not alone, but the law is pretty clear that such gifts to specific individuals or families are not deductible as charitable contributions. Here’s an explanation:

1. Sections 170(a) and (c) of the Internal Revenue Code allow a tax deduction for contributions made “to or for the use of” qualified Section 501(c)(3) organizations. In contrast, contributions to specific individuals, no matter how deserving, are treated as private gifts and do not qualify as deductible contributions.

The U.S. Supreme Court has written that, “Charity begins where the certainty in beneficiaries ends, for it is the uncertainty of the objects and not the mode of relieving them which forms the essential element of charity.” Put another way, there is no charitable gift where the beneficiaries do not amount to a “charitable class.” Accordingly, whenever a donor designates a beneficiary by name or limits the benefits to a small specific group of identified recipients, the gift does not qualify as a charitable contribution for tax purposes. Indeed, if the gift is sizable enough, the donor may be required to pay gift tax (i.e., if the amount exceeds the annual gift tax exclusion).

2. Similarly, donors wanting to help a specific individual cannot indirectly obtain a deduction by designating a gift for a person and passing the gift through a 501(c)(3) organization. This is referred to as “earmarking” and arises from any agreement (verbal or written) that the charity will use the donation for a specific individual identified by the donor. Once again, a donation is not considered a charitable gift if the surrounding facts and circumstances establish that the charity was simply an intermediary for a gift to a specific individual. As general rule, the law won’t let you do something indirectly that you could not do directly.

The IRS applies two tests to determine whether a contribution is improperly earmarked:

1. Does the recipient organization have discretion and control over the contribution? If not, then there is a strong argument the funds are not deductible as a charitable contribution. Alternatively, if the organization has the option to apply the donated funds to purposes other than those preferred by the donor, then this supports the deductibility of the contribution.
2.  Is the donor’s intent to benefit the charitable organization or a designated individual? If the facts indicate the donor intends to benefit the organization, this supports the deductibility of the gift. Memorializing in writing the terms of the gift provides strong evidence of donor’s intent. Also, the IRS may review the recipient organization’s fundraising literature as well as the donor’s gift receipt to determine whether a donation is improperly earmarked.

Note that general use restrictions, such as a restriction to use funds for a nursing scholarship or a fund to support the creation and operation of a youth mentoring program, are acceptable and would not be considered improper earmarks.

For the sake of clarity, the IRS has suggested adding the following language to fundraising materials, gift agreements, and donor gift acknowledgment correspondence:

“This contribution is made with the understanding that [INSERT NAME OF ORGANIZATION] has complete control and administration over the use of the donated funds.”

In sum, donations given directly to an individual or earmarked for a particular individual are treated under the law as gifts to the designated individual and are NOT tax deductible. This is not meant to discourage you from being generous and compassionate whenever possible, just understand that in situations like this, the government is not going to subsidize your philanthropy with a tax deduction.

If you have questions about nonprofit law, governance, or other compliance issues facing Virginia nonprofit organizations, call or email us anytime. We are here to help!