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.
References:
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)
