Gifts that May Not Qualify as Contributions

Some types of gifts do not result in a tax deduction and no contribution acknowledgment should be provided by the charity:

  • Earmarked gifts. When computing one’s tax return, most taxpayers know that they cannot count tuition payments as a charitable deduction, even though the check is made out to a charity. In addition, most taxpayers know that their tuition payments are still not deductible if they are paid to a charity with instructions to forward the funds to a certain educational institution.

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Unfortunately, far too few donors and charities apply the same logic to other similar circumstances. In too many situations, it is generally accepted that when grants or gifts cannot be made directly, all one must do is pass the money through a convenient "fiscal agent," which is frequently the local church or other charity.

An earmarked gift is a transfer that has not been made to a charity in a deductible form because the recipient charity’s function is as an agent for a particular noncharitable recipient.

Here are a few examples of the improper use of a charity as a fiscal agent in an effort to obtain a charitable deduction:

"I want to help my friends Fred and Mary who are going through a tough financial time because of a recent hurricane. I realize they have no connection with your ministry but if I give the ministry $500, will you pass it through to them and give me a charitable receipt?"

"I want to give $10,000 to the ministry so the funds can be passed on to a college to cover the tuition for the pastor’s daughter. Will the charity process this gift and give me a receipt?"

Examples like these are donations "earmarked" for individuals. They are also called "conduit" or "pass-through" transactions. These connotations are negative references when used by the Internal Revenue Service (IRS) and generally denote amounts that do not qualify for a charitable deduction. To be deductible, the charity must have discretion and control over the contribution without any obligation to benefit a designated individual.

A telltale sign of an earmarked gift is when someone says they want to "run a gift through the ministry," "pass a gift through the ministry," or "process a gift through the ministry." Of course, it is possible the donor will not so clearly signal an earmarked gift and use more general terminology. This is why charities should clearly understand the concept of earmarked gifts in addition to an awareness of telltale terminology.

Though the concept in tax law is well-established, it can be hard to apply to specific situations. Several issues may impact the complexities of these gifts:

  • The donor’s motivation may be loving and charitable in a broad sense; they really want to help, and the only problem is their desire for control.

  • Many organizations are lax in monitoring this area, and the donor may well say, "If your charity won’t process this gift for me, I know of another charity that will handle it."

  • Sometimes the difference between a nondeductible earmarked gift and a deductible restricted gift is not who benefits but only who determines the beneficiary.

However, wise charity leaders will establish and follow clear policies to prohibit donors from passing money through a charity simply to gain a tax benefit.

Though many charitable donations are based on a sense of charity, selflessness, and even love, the IRS believes that people may also have other motivations. The law prevents donors from having undue influence over charities and restricts donors from manipulating a charity into serving noncharitable interests and themselves receiving a deduction for it at the same time.

A special category of earmarked gifts is one in which a donor passes a gift through the charity for the donor’s personal benefit. Such gifts often raise issues beyond the loss of a charitable deduction. Examples include:

  • Scholarship gifts passed through a charity for the donor’s children (instead of paying tuition) raise allegations of tax fraud.

  • Gifts by a donor to purchase life insurance on the donor benefiting the donor’s family resulted in a law which can cause substantial penalties for both the donor and organization.

Gifts to a charity for the support of missionaries or other workers (often called “deputized fundraising”) are subject to a different set of guidelines than those generally associated with earmarked gifts. Gifts made under a properly structured deputized fundraising program are generally tax deductible to the donor.

  • Strings attached. A gift must generally be complete and irrevocable to qualify for a charitable deduction. There is usually no charitable deduction if the donor leaves "strings attached" that can be pulled later to bring the gift back to the donor or remove it from the control of the charity.

Example:  A donor makes a "gift" of $10,000 to a church. The "gift" is followed or preceded by the sale from the church to the donor of an asset valued at $25,000 for $15,000. In this instance, the $10,000 gift does not qualify as a charitable contribution. It also raises the issue of private inurement relating to the sale by the church.

  • Services. No deduction is allowed for the contribution of services to a charity.

Example:  A carpenter donates two months of labor on the construction of a new facility built by your church. The carpenter is not eligible for a charitable deduction for the donation of his time. The carpenter is entitled to a charitable deduction for any donated out-of-pocket expenses including mileage (14 cents per mile for 2016) for driving to and from the project. If the donated out-of-pocket expenses are $250 or more in a calendar year, the carpenter will need an acknowledgment from the church.

  • Use of property. The gift of the right to use property does not yield a tax deduction to the donor.

Example:  A donor provides a church with the rent-free use of an automobile for a year. No charitable deduction is available to the donor for the value of that use. If the donor paid the taxes, insurance, repairs, gas, or oil for the vehicle while it is used by the church, these items are deductible as a charitable contribution based on their cost.

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