Many foreign-born Americans would like to make charitable donations to organizations in their home countries where they continue to have strong ties. In some cases, these individuals may simply donate to a U.S.-based charity with a broad international reach. However, if the donor has in mind a specific foreign charity that is not directly supported by an organization that the U.S. recognizes as a section 501(c)(3) tax-exempt charitable organization, then the task becomes less clear and gives rise to the following questions:
1. Is the donation tax deductible for U.S. income tax purposes?
2. Will my money be well spent?
3. How do I know that the charity selected does not indirectly support organizations that are counter to the interests of the U.S.?
In general, donations that a U.S. citizen makes directly to a foreign charity will not qualify for an income tax deduction unless the charity is registered as a tax-exempt entity with the IRS or there is relief available under a U.S. income tax treaty. Rarely will a donation to a foreign entity meet either of these two requirements. Fortunately, there are a few options that donors may use to benefit a foreign charity and secure a deduction on their U.S. tax returns. The balance of this articles explores the use of a donor-advised fund or a private foundation to facilitate the donation.
A donor-advised fund (DAF) is a charitable-giving tool sponsored by a U.S. 501(c)(3) that allows individuals to qualify for a tax deduction when they donate to nonprofits whose philanthropic missions include assisting approved foreign charities. The donor makes a contribution to a U.S.-approved DAF, takes a tax deduction in the year of funding the DAF and directs which charities it recommends to receive grants from the DAF over time.
A DAF has the advantages of being easy to implement by allowing donors to use the sponsoring charity’s platform with little or no added cost to the donor. However, one downside to the DAF is that unless the U.S.-sponsoring nonprofit has already vetted a specific foreign charity, there is some degree of uncertainty as to whether or not a donor’s funds will reach the intended organization.
To gain more control over the foreign-charity selection process, a donor may instead establish a U.S. private foundation (PF), which is a separate legal entity formed for the purpose of philanthropic activity. Once established in accordance with IRS guidelines, the PF can receive deductible donations (usually from the individual, family or business that formed the PF) and then make grants to specific foreign charities identified by the donors.
Private foundations must take certain due diligence steps to ensure that the foreign charities they select to receive grants are equivalent to U.S. public charities (known as equivalency determination) and therefore eligible for PF grants. In addition, PFs need to ensure that the selected charities comply with U.S. anti-terrorism and anti-bribery laws.
The IRS recently published a new, simplified procedure for PFs to meet the foreign charity equivalency determination test. Specifically, effective Sept. 14, 2017, PFs must obtain written advice from a tax-qualified practitioner who can make a good faith determination that a foreign grantee would likely qualify as a public charity under U.S. guidelines.
An alternative to the equivalency test is available to PFs that sponsor specific projects in foreign countries. In these situations, the IRS requires the PF to conduct thorough pre-grant due diligence of the project to document the charitable purpose of the grant. In addition, the PF must continue to monitor the project’s activities and report to the IRS information demonstrating that the foreign organization used the funds responsibly.
Private foundations meet the long-term philanthropic goals and needs of individuals and families. Although they provide a higher level of control over the charity selection, there are annual administration and compliance costs to meet IRS requirements.
There are numerous ways for U.S. taxpayers to approach charitable giving based upon their specific circumstances and financial objectives. The professional advisors and accountants with Berkowitz Pollack Brant work closely with domestic and international individuals, families and businesses to design gift giving opportunities to U.S. and foreign- based charities.
About the Author: Lewis Kevelson, CPA, is a director with Berkowitz Pollack Brant’s International Tax practice, where he assists cross-border families and their advisors with personal financial planning and wealth management decisions. He can be reached in the firm’s West Palm Beach, Fla., office at (561) 361-2050 or via email at firstname.lastname@example.org.
Published on December 11, 2017 by Lewis Kevelson
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