1 / 10100%
Charitable donations are normally gifts of cash or property that gets made to a nonprofit and the
donator gets nothing of value or services in return (Investopedia Team, 2022). This is normally used to
reduce federal tax returns which is why many people prefer to give to charity instead of paying taxes
at times (Investopedia Team, 2022). Unfortunately, Muhammad will not be able to receive these
benefits because the IRS rules require that the donation needs to be made to a registered charity (Moss,
2022). This can be found in IRS tax publication 526 t which has a limited but specific international
charity (Moss, 2022).
However, there is the option of donating in his will instead of through charity while he is alive is a
much better option. When donating through your will there are less stringent restrictions when it
comes to who you can donate to (Thrivent, 2023). This will allow more to be given to the foreigner
foundation of his choice (Thrivent, 2023). Though he will have to pay income taxes this will save a lot
of money from the gift tax that he will need to pay if he goes through with it while he is alive
(Thrivent, 2023). He could set up a Charitable trust if he feels as strongly as he does with the
foundation (Wong, 2023). This way over the course of 20 years he could continue to give to his
foundation (Wong, 2023).
According to the Internal Revenue Code Section 170(a)(1), a taxpayer can deduct a charitable
contribution of money or property made to or for the use of a qualified organization, in the tax year on
which they are donated. Now, this comes with limitations to the deductibility of charitable
contributions, as outline in IRC section 170(b), the amount of the deduction may not exceed 50% of
the taxpayers adjusted gross income (AGI) for the taxable year. In Muhammad case, it seems like he is
donating 50% of his annual salary and bonus/incentive compensation income, so based on these facts
alone, he should be under those limitations. The main issue, however would be if the Pakistani Cricket
Foundation in Islamabad is a qualified organization under the regulations established in the US. Under
IRC Section 170(c) we found that a “qualified organization” generally includes nonprofit groups that
are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty
to children or animals. In addition, a qualified organization needs to be registered in the US and meet
with the IRC Section 501(c)(3) rules and regulations. It seems like the Pakistani Cricket Foundation
does not meet the qualifications to be a “qualified organization”, which would deem Muhammad’s
donation not deductible from his income tax.
When it comes to persuade Muhammad to be more patient and make the donation in his will, the
situation may not change a lot. As the estate tax deductions have similar restrictions to income tax
deductions (as per IRC Section 2055) and it seems unlikely that the IRS would allow a deduction for
bequest to a non-U.S. registered charity like the Pakistani Cricket Foundation. The possible benefit of
waiting is if Muhammad’s estate would be subject to estate tax, as in this case the donation would
reduce his taxable estate, also reducing his estate tax liability. Moreover, I would also consider
Muhammad’s wishes, what if he would like to make the donation while he is alive so he can see the
impact his generosity has in the organization. These would be points to discuss with the client.
[I do wonder if there is a way to structure a Charitable Trust in a way that it will help the Pakistani
Cricket Foundation. Something like the court case we read this week (Buder v. United States]
It is not likely Muhammad will get an income tax deduction for his donation of $1 million. “Only U.S.-
based charities are eligible to receive tax-deductible charitable contributions from U.S. taxpayers.”
(CCH, 2022) To qualify for a charitable deduction, the donation must be to an organization described
in the IRC §2055 and made only for a purpose allowed by the IRC §2055. If he had chosen a U.S.
Charity a “deduction for charitable contributions generally can't be more than 60% of your AGI, but in
some cases 20%, 30%, or 50% limits may apply.” (IRS, 2022)
There are situations that one can put themselves in where “depending on the foreign jurisdiction, a
U.S. charity may be able to form a subsidiary charitable organization within that country that is
qualified to receive contributions that are deductible for income tax purposes in both the United States
and that foreign country.” (CCH, 2022) This would permit foreign subsidiary be treated as a branch of
U.S Charity and as a subsidiary donation made by U.S. parent charity will be donations for U.S. tax
purposes. I can see how this may not apply here but good for future reference.
As the financial advisor I would recommend forming a charitable remainder trust. Charitable
remainder trusts are irrevocable trusts that let you donate assets to charity and draw annual income for
life or for a specific time.” (IRS, 2022) We would provide instructions for the income to go to family
or whomever he designates and remainder or however much to be determined and turned over to the
Pakistani Cricket Foundation.
Will Muhammad likely get an income tax deduction for his planned $1 million donation? Why or why
not?
Muhammad will not receive a tax deduction for $1 million donation. According to IRS Publication
526 t the foreign organization is deemed a non-qualified organization. There are certain Canadian,
Israeli, or Mexican organization that could qualify but not for Islamabad. The U.S. has tax treaties
with those countries and that is why it is allowable for certain organization in those countries.
Should you try to persuade Muhammad to be more patient and make the donation in his will? Why or
why not?
Yes, Mr. Muhammad should be persuaded to be patient and donate in will. He does not receive income
tax deduction but can receive benefit of estate taxes in accordance to IRC 2055. Charitable
contribution can be deducted from gross estate.
Charitable deductions for income tax purposes are allowed under IRC §170, where any charitable
contribution made within the taxable year is deducted with a 50% limitation under IRC §170(b). The
contribution is further defined under IRC §170(c)(1) as a gift for the use of a state, a possession of the
United States, or any political subdivision of the foregoing, or the United States or the District of
Columbia, but only if the contribution or gift is made for exclusively public purposes. As such, an
income tax deduction is not applicable for any contribution to a foreign entity and Muhammad would
not see a legal deduction for $1 million contribution made to the Pakistani Cricket Foundation in
Islamabad.
Despite this, charitable contributions and transfers made at the bequest of a will are defined
differently. IRC §2055 allows for the deduction of transfers from an estate to organizations with a
public, religious, charitable, scientific, literary, or educational purposes, a fraternal society, veterans
organization, or employee stock ownership plan. CFR §642.1(c)-1 permits an unlimited deduction for
any part of the gross income of an estate or trust for payments made to entities with purposes specified
in IRC §170(c). In addition, CFR§642(c)-1(a)(2) allows for contributions and transfers to be made to a
corporation or trust as defined by IRC §170(c) even if the entity is not created or organized in the
United States, any State, the District of Columbia, or any possession of the United States. Although,
Muhammad would not receive an income tax deduction for a current donation, he may specify an
amount in his will that would allow for his estate to take advantage of a charitable contribution
deduction despite the geographical and originating location of the foundation without the monetary or
percentage limitations prescribed by IRC §170.
26 CFR §642-1
26 IRC §170
26 IRC §2055So unfortunately, Muhammad will not be getting the income tax deduction for this
donation of $1 million. This is because the Pakistani Cricket Foundation is not a registered U.S.
charity. The governance for qualified charities can be found in I.R.C § 501(c)(3). We can also find
more in-depth information about what charitable contributions qualify as deductions to which
organizations. Listed on the “not deductible as charitable contributions” side is money or property
given to foreign organizations. However, it is interesting to add that charitable contributions to
qualified charities in Israel, Canada, and Mexico can be deducted. In regards to advising Muhammad
to be patient and make a qualified donation in his will or not, I think the answer of this depends. If
Muhammad is set on contributing to the Pakistani Cricket Foundation, then it would not matter
whether he donate now or wait and donate through his will. This is because as stated above, the
organization is not a qualified charity. Now if Muhammad decides to change his donation to a
qualified charity, I believe that he should wait and have it outlined in his will. This is because
“charitable contributions generally can’t be more than 60% of your AGI, but in some cases 20%, 30%,
or 50% limits apply.” (IRS Publication 526) However, donations made from your estate have no limit
and he would be allowed an unlimited deduction to a charity which is under the governance of IRC §
2055.
Many charitable donations, whether they be one-time gifts or sporadically given, are usually small in
amount and done without thought of personal gain to the giver. For example, rounding up your bill at
the checkout of your local grocery store with proceeds going to a food pantry or food program, or
dropping some money in the Salvation Army’s red pots during Christmas time. Though all these
donations are tax deductible none are usually recorded for said purposes, they are given and forgotten.
But what of the larger donations, the ones that take days, weeks or even months to process, the
donations that need authorizations to both give and to receive. Muhammad an engineer working and
currently living here in Virginia wants to make 1 said donation with his salary as the source. Of his
$2M yearly earnings, Muhammad would like to donate half of his annual pay as a one-time gift with
the hopes of receiving a tax deduction on his next tax returns. Muhammad regardless of his citizenship
status, whether working with a visa or through an exchange program, his earnings that are applicable
to U.S. Tax Code would be processed according to the specifically enforceable tax laws in effect
during the time in which Muhammad wanted his donation to take place.
As a (potential) non-resident alien, Muhammad would be entitled to all the benefits of the charitable
contribution deduction (and other deductions) only by filling an accurate U.S. income tax return. A
charitable contribution deduction is not taken into consideration when the only source of income
exposed to U.S. income tax is subject to gross withholding tax at source. This situation will thus
necessitate a U.S. income tax return to claim the deduction, which the non-resident alien client may
not be willing to file (Treas. 873).
Unfortunately for him, his desired charity, the Pakistani Cricket Foundation, with headquarters in
Islamabad, is not a registered charity in the U.S., therefore a direct income tax deduction cannot be
given under these conditions. To qualify for a charitable deduction, the donation must be to an
organization described in IRC §2055 and made only for a purpose allowed by §2055. Using this
example Muhammad would donate his funds and still be accountable receiving little or no refund for
the withholding taxes, whether they cover his income tax amount in full by year end, or if he has a
federal/state tax balance due by the close of the tax season in which the donation was processed,
because the donation in full would not be acknowledged for any deduction or credit.
As his financial advisor I would suggest he consider the formation of a Trust for his donation, with all
incomes and earnings reverting to cover its expenses with instructions for the proceeds from the Trust
and its holdings to be turned over in full to the P.C.F. upon Muhammad’s death. By doing this not only
can the $1M donation grow beyond its current value but any excess from the trust created can be used
to offset any tax consequences if current IRC 2055 change before his passing.
Will Muhammad likely get an income tax deduction for his planned $1 million donation? Why or why
not?
Muhammad may not get an income tax deduction for his planned $1 million donation to the Pakistani
Cricket Foundation. The donation should be made to organizations that are identified as tax-exempt by
the tax authority in the jurisdiction to qualify for a tax deduction. As the foundation is not registered as
a U.S. charity, it may not achieve tax-exempt status under U.S. tax laws (Duquette, 2019). Here,
Muhammad should speak with a tax expert who can study the tax laws and rules regulating charitable
contributions in both the United States and Pakistan in order to ascertain whether he is eligible to
claim a tax deduction. They can evaluate whether there are any laws or agreements between the two
nations that might permit credits or deductions in this situation.
Should you try to persuade Muhammad to be more patient and make the donation in his will? Why or
why not?
If Muhammad wants to contribute to the Pakistani Cricket Foundation, I would suggest considering
making the donation through his will, which could be a viable option based on his personal objectives
and circumstances. Muhammad may reduce the estate tax liability on his assets by making the
donation by his will. Here, charitable bequests can help to minimize the estate’s taxable value, which
leads to potential tax benefits for his heirs. It is crucial to determine Muhammad's entire financial
status (Duquette, 2019). Making a charitable bequest in his will could be a smart strategy to promote
his philanthropic aspirations while considering his financial security if he has enough assets and
income to fulfil his present and future requirements.
It is essential to comprehend Muhammad's inner motives and aspirations. He can achieve his
philanthropic goals by leaving a bequest in his will if he feels strongly about promoting cricket in his
own country. Moreover, it is crucial to remember that estate planning is a complicated topic with
potential legal and tax repercussions. Muhammad should speak with a financial counsellor or estate
planning lawyer who focuses on charitable giving in order to fully grasp the ramifications for his
estate under both Pakistani and American tax laws.
When it comes to tax deductions for charitable donations in the United States, the IRS provides
guidelines and regulations that determine which organizations qualify for deductions. According to the
IRS, to claim a charitable deduction, the recipient organization must generally be a qualified charitable
organization recognized by the IRS. These organizations typically include those that are organized and
operated exclusively for charitable, religious, scientific, literary, or educational purposes, among
others.
The specific requirements for qualifying as a charitable organization can be found in the Internal
Revenue Code (IRC) section 170(c). However, the IRC primarily focuses on organizations within the
United States. Generally, organizations that are not U.S. registered charities are unlikely to meet the
criteria set forth in the IRC for deductible charitable contributions.
Additionally, U.S. Treasury Regulations provide further guidance on deductibility of charitable
contributions. Treasury Regulation section 1.170A-1(c)(2) states that contributions to foreign
organizations are generally not deductible unless the organization falls under specific exceptions
mentioned in the regulations. These exceptions typically apply to certain Canadian, Israeli, and
Mexican organizations, and they are subject to specific requirements outlined in the regulations.
Another way around this rule is if the charity is domestic but our case deals with a foreign so that
won’t work either. Since the Pakistani Cricket Foundation is not a U.S. registered charity and does not
appear to fall within the exceptions mentioned in the regulations, it is unlikely that Muhammad would
be eligible for an income tax deduction for his donation.
Regarding the question of whether Muhammad should be encouraged to make the donation in his will,
it is important to consider various factors, including personal circumstances and estate planning goals.
Donating through a will allows individuals to plan their charitable giving in a strategic and thoughtful
manner, ensuring that their wishes are carried out after their passing. Furthermore, making a bequest in
a will may provide potential estate tax benefits, depending on the individual's overall estate planning
and the prevailing tax laws at the time. The exact tax implications would depend on the specific
provisions of the tax law in effect during the individual's lifetime and at the time of their passing.
IRC 170
Treasury Regulation section 1.170A-1
Duquette, N. J. (2019). Founders' Fortunes and Philanthropy: A History of the US charitable-
contribution Deduction. Business History Review, 93(3), 553-584.
Anderson, K.E., Pope, T.R. & Rupert, T.J. (2023) Taxation 2023 Corporations, Partnerships,
Estates & Trusts Pearson. (Chptr Charitable Donations/Transfers)
Cerny, Milton (May 28, 2010) International Charitable Giving and Estate Planning.
McGuireWoods. Retrieved May 30, 2023. https://www.mcguirewoods.com/news-
resources/publications/taxation/internationalcharitablegiving.pdf
IRC § 20.2055-1(a)(2)
Treas. Reg. § 1.873-1(e)(2)(iii)
Section 873(a)
Section 873(b)(2)
I.R.C. § 501(c)(3)
I.R.C. § 2055
IRS Publication 526
Buder v. United States, 7 F.3d 1382, 1993 U.S. App. LEXIS 28005, 93-2 U.S. Tax Cas. (CCH)
P60,149 (United States Court of Appeals for the Eighth Circuit October 29, 1993, Filed).
https://advance-lexis-
com.ezproxy.snhu.edu/api/document?collection=cases&id=urn:contentItem:3S4X-BS60-003B-P2Y8-
00000-00&context=1516831.
CCH Answer Connect Editoria (October 25, 2022) Deductions for foreign charitable giving Retrieved
on: https://www.wolterskluwer.com/en/expert-insights/deductions-for-foreign-charitable-
giving#:~:text=Individuals%20wishing%20to%20donate%20to,charitable%20contributions%20from
%20U.S.%20taxpayers.
IRC § 20.2055-1(a)(2)
IRS 22-Aug-2022 Charitable Remainder Trusts Retrieved on: https://www.irs.gov/charities-non-
profits/charitable-remainder-
trusts#:~:text=Charitable%20remainder%20trusts%20are%20irrevocable,File%20all%20required%20
tax%20documents
Investopedia Team. (2022, November 22). Charitable Donation: Definition, Examples, Tax Deduction
Rules. Investopedia. Retrieved June 1, 2023, from
https://www.investopedia.com/terms/c/charitabledonation.asp
Moss, W. (2022, December 12). How Charitable Giving Can Impact Your Taxes. The Balance.
Retrieved June 1, 2023, from https://www.thebalancemoney.com/how-charitable-giving-can-impact-
your-taxes-1289751
Thrivent. (2023, February 28). How To Donate to Charity in Your Will | Thrivent. Retrieved June 1,
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Wong, B., JD. (2023, May 11). Charitable giving in trusts. LegalZoom. Retrieved June 1, 2023, from
https://www.legalzoom.com/articles/charitable-giving-in-trusts
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