Relief efforts are underway to assist victims of Hurricane Harvey and those affected by the catastrophic flooding in Texas and Louisiana. Many well-meaning Americans are making donations through a variety of organizations. Most of the donations will provide much-needed assistance, but a lot of it won’t. In this post, we focus our attention on how to make effective, tax-deductible donations for disaster relief.
Donate through a qualified charity
Although donating through a 501(c)(3) charitable nonprofit organization is hardly a guarantee for proper management, it does provide assurance that there is at least some degree of oversight and accountability. It also allows you to deduct the amount of your gift from that year’s taxes. 26 U.S. Code § 501(c)(3). Make sure that you get an acknowledgment letter from the organization with its 501(c)(3) number (note that churches and other religious organizations are not required to apply for 501(c)(3) status). Also, keep in mind that there are charitable organizations to which contributions are not deductible (e.g., 501(c)(4) social welfare and civic organizations). Further, most contributions to foreign charitable organizations are not deductible. See Internal Revenue Service (IRS) Publication 78.
Do your research
Even valid charities have issues. In our 2015 blog post on charity scams, we mentioned how important it is to research the activities of the charities to which you donate, and follow up on the outcomes of their efforts.
Donate only what is needed
After the 1998 Honduras earthquake, an airplane filled with desperately needed supplies for the tens of thousands who were without food, shelter and clean water was unable to land because excess donations of clothing (including winter coats!) were left on the runway.
In 2012, an estimated 65,000 teddy bears were donated to Sandy Hook Elementary School – nearly three times the entire population of Newtown, Connecticut.
For both practical and tax reasons, usually the best thing to donate is money. Unless specifically requested, volunteers can be more of a hindrance than a help to relief organizers – and your time is not tax deductible. In nearly every case, cash donations are far more useful because they allow local relief organizations to purchase necessary items.
In the modern digital age it isn’t hard to make online inquiries with people affected by the disaster to find out what is really needed in their community. After all, donating shouldn’t be about what we want to give– it should be about getting people what they need.
Floyd "Money" Mayweather certainly lives up to his nickname – the undefeated boxer is expected to cash in as much as $350 million for his recent win against Irish UFC fighter Conor McGregor.
There is also no doubt that the IRS was watching the 10-round Las Vegas match. The federal government is still awaiting payment on Mayweather’s 2015 tax bill, and hit the fighter with a hefty IRS tax lien this past July. It looks like Mayweather now has the cash to pay his debt.
Tax evasion or investment strategy?
Since 2004, Mayweather has had several tax liens filed against him. Numerous commentators have been trying to determine whether this is indicative of the fighter’s disdain for meeting his tax obligations, inability to pay his tax debts, or – as his tax attorney has argued - is part of an overall investment strategy.
This past July, Mayweather – who has earned an estimated $700 million during his career – filed a petition in tax court requesting a short-term installment agreement of less than three months to pay the $22,238,255 he owes as a result of a $250,000 million payout for his 2015 win against Manny Pacquiao. Mayweather’s tax lawyer has stated that "Money" does not have the cash to satisfy his debt immediately, and that the delay in payment is part of an overall investment strategy to retain investments with earnings that exceed IRS late- and underpayment penalties. With an upcoming fight that promised to pay off his outstanding tax bill – and more — it made sense for Mayweather to retain illiquid assets and wait a short time before satisfying the debt.
The cost of delay
With few exceptions, the penalty for failure to pay your taxes by the April 15th deadline is 0.5% of the amount owed for each month (or part thereof) in which the tax remains unpaid, up to a maximum of 25% of the tax bill. 26 U.S. Code § 6651(a)(2). This increases to 1% per month if the tax bill remains unpaid 10 days after the IRS issues a Notice of Intent to Levy. 26 U.S. Code § 6651(d)(1). In addition, there are penalties for failure to make estimated payments during the tax year. Not to mention interest on the delinquent balance.
The importance of tax planning
Unless you have a team of advisors and an investment plan that makes it worthwhile to incur these tax penalties, it is best to put aside a portion of any windfall earnings you make during the year for the IRS. The tax attorneys and accountants at Moskowitz, LLP has delivered top quality tax planning advice to tens of thousands of U.S. taxpayers. Contact our San Francisco offices today.