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.
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6 comments on “Year End Tax Planning: US Expats Making Charitable Contributions”
Can US expats who pay tuition to child’s private religious school in Canada, registered Canadian charitable organization and the school itself would also qualify in the US to receive deductible contributions if it were resident in the US, deduct those donations on 1040? The treaty allows US citizen Canada resident to deduct charity on 1040. percentage limitation test met. The treaty language is organization and NOT the nature of the payment -tuition. Since the treaty language used is organization and the parent made a (tuition) payment to a QUALIFIED CDN ORGANIZATION, shouldn’t taxpayer be entitled under the treaty [Form 8833 disclosure overriding IRC S 170(b) (c) citing Article XXI(6)] to claim such deduction on 1040 ? This would be in spite of the fact that, had the school been a US resident qualified charity, tuition paid to it could not be deducted on the 1040.
I think common sense has to prevail here. The text of the Treaty section is copied below. Note constant use of the word “CONTRIBUTION” and “DEDUCTIBLE CONTRIBUTION”. A payment for tuition cannot be considered a “contribution”.
For the purposes of United States taxation, contributions by a citizen or resident of the United States to an organization which is resident in Canada, which is generally exempt from Canadian tax and which could qualify in the United States to receive deductible contributions if it were resident in the United States shall be treated as charitable contributions; however, such contributions (other than such contributions to a college or university at which the citizen or resident or a member of his family is or was enrolled) shall not be deductible in any taxable year to the extent that they exceed an amount determined by applying the percentage limitations of the laws of the United States in respect of the deductibility of charitable contributions to the income of such citizen or resident arising in Canada. ….
It says, as you quote: contributions by a citizen or resident of the United States TO AN ORGANIZATION which is resident in Canada. In Canada, unlike in the US, tuition is considered a DEDUCTIBLE CONTRIBUTION and is tax receipted. The organization, which is the focus of the treaty, is qualified. There is a strong common sense argument that the treaty puts on equal footing Canadian and US organizations. By doing that, the fact that the contribution’s deductibility differs between the two countries should not matter for treaty purposes. A novel result.
Further, the treaty language you cite “which could qualify in the United States to receive deductible contributions if it were resident in the United States” is fully met because any donation made to such private religious school in Canada by a person with no enrolled children and no tuition obligation would be allowed to deduct the donation in both countries and the school itself qualifies to receive such deductible contributions. It just so happens that if a parent of an enrolled student makes the payment to fulfill tuition obligations, the two countries’ DOMESTIC tax laws differ as to whether or not to allow a deduction.
While I agree that there “is a strong common sense argument that the treaty puts on equal footing Canadian and US organizations”, I still do not believe that a tuition payment would be treated as a charitable contribution and am not “sold” on this. If you read the Treaty, it seems to me the Treaty addresses the point about conflicts of domestic law (Definitions Art III. Cl 2)
“As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires and subject to the provisions of Article XXVI (Mutual Agreement Procedure), have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.”
So, “unless otherwise required and subj to the Mutual Agrmt Proced.”, I believe the term “contribution” would be defined by US law and a tuition payment would not be covered.
If you wanted to take the position regardless (I would not do so), my considered “guess” is that so long as you disclosed the position fully on the tax return (I believe Form 8275 is the form number) you might possibly escape penalties if the IRS disagrees with your analysis. Not sure on this….they may require the Mutual Agrmt Procedure.
Have you reached out to other colleagues who may have more input? I have not dealt with the US Canada Treaty.
Good discussion and thank you for raising the point!
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