Question of the Week: Are Donations to Friends Tax Deductible?

Question:  I feel terrible for those affected by the recent Maui wildfires.  An old friend living in Maui was displaced by the fires and lost everything she owns.  I would like to organize a crowdfunding drive to provide financial support to her and would like to ask my church to serve as a conduit to transfer donated funds to her.  Would these donations be tax-deductible?

Answer: No, these donations would not be tax-deductible, and here’s why.  First, there is no question that you can crowdfund to help those in need.  As a practical matter, most people might like to receive some form of assurance that the funds are being spent for her benefit, but it is clearly legal to ask and transmit the money you receive for her benefit.

The legal issue arises because such gifts are not deductible as charitable contributions by the donors. A tax deduction is NOT available for a gift to an individual, only for a gift to a charity recognized as tax-exempt under Section 501(c)(3) of the Internal Revenue Code. Even the gift you describe to the church for your friend’s benefit would not be deductible because the donation is essentially going to a pass-through fund earmarked for the friend. The IRS treats that type of gift as a gift directly to the individual(s) and, thus, not deductible.

Gifts to recognized charities for disaster relief funds run by organizations like the American Red Cross would be deductible so long as the sponsoring organization makes the ultimate decisions on how the funds will be utilized.

So in this situation you have to make a fundamental choice as to what is more important—making sure your friend receives the support she needs or making sure your generous donors enjoy a tax deduction for their donations.   On the one hand, you can’t assure that the donations would be used for the benefit of your friend if they are made to a disaster relief fund, so if helping your friend is your primary objective—an admirable one—then don’t let the tax consequences to donors deter you. Most taxpayers do not itemize charitable contribution deductions these days anyway because of the recent increase in the standard deduction eliminates a direct tax benefit from the contribution.  In other words, most people inclined to support your fundraising effort probably won’t be concerned about the deductibility of their gift.