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 United States 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 contributions by individuals to a charity created or organized under the laws of a foreign country, unless otherwise excepted, are not deductible for income tax purposes. However, exceptions may exist 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. 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.”
Is the Taxpayer Itemizing Deductions?
Second, the taxpayer must itemize deductions on Schedule A of his tax return in order to receive tax benefits. Taxpayers using the standard deduction are not entitled to any charitable contribution deduction. The deduction for charitable contributions generally cannot be more than 50% of the taxpayer’s adjusted gross income, but in some cases 20% and 30% limits may apply.
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., 2013) will be deductible for that year even if they are not cashed until the following year (e.g., 2014).
Does the Taxpayer Have 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.