Using the gift exception to get more money to charity

Question

Like most middle class families after the 2018 tax code changes, even with a mortgage I'm very far from being able to itemize. Looking at how to optimally give to charity, it seems like a shame to not be able to give 20-30% more just from tax deductions.

I then considered a potential loophole. If I give a sum of money less than the $15,000 tax free gift limit to a trustworthy high-income friend who already itemizes, that person can then donate the money to charity. In addition, he or she could also donate the amount it saved them on their taxes. The net result would be that the charity gets more money.

I'm skeptical that I've somehow beaten the system, but I'm not sure where this would cause problems. I'm not getting consideration in return for the gift; it's just going to a charitable organization, and not even in my name.

I understand the potential for abuse, since the "trustworthy friend" could just pocket the money, but my question is whether I'll run afoul of the IRS doing this, not whether this is a good idea.

Another approach to being able to deduct charitable giving is to save up for many years and give all the money in one year in order to get a tax deduction. The give-to-a-high-income-individual approach results much more money for charity, consider a simple example. Someone making $80,000 per year with $10,000 in itemized deductions in a given year might save up $50,000 and donate all that money to charity in a given year. That would reduce their taxable income by roughly $48,000 relative to that standard deduction. This saves them an additional roughly $10,000 to give to charity based on a simple calculation here. Giving the 50,000 to a high income individual (over many years instead of saving for one year) lets that individual deduct the money at a high marginal tax rate. At a 35% tax rate that would save an additional $17,500 to donate to charity. And just donating it each year without saving and donating on one year would result in $0 extra for charity.

JTP - Apologise to Monica · Accepted Answer

Step Transaction Doctrine.

This is why the plan runs afoul of IRS regs. From the linked IRS doc -

"Under the step transaction doctrine, "a series of transactions
  designed and executed as parts of a unitary plan to achieve an
  intended result ... will be viewed as a whole regardless of whether
  the effect of so doing is imposition of or relief from taxation."

Note the wording. "Intended result" and "regardless....imposition of or relief from taxation."

The fact that your heart is in the right place, and the whole plan is to get more money in the hands of the charity is not the issue.

That said, the IRS misses hundreds of millions of dollars in value that billionaires shift to their children through questionable means. I'd have a tough time imagining that anything less than a forensic audit would push an agent move beyond "Oh, the charity gave you a receipt for your $10K donation, thanks".

TL:DR - To put the IRS regs in layman's terms - (And thanks to @TTT) "A gift is not a gift if there are strings attached."

yoozer8 · Answer

Since you're not concerned about why this is a bad idea, but instead want to know whether this is tax fraud (assuming that's what you mean by "run afoul of the IRS"), the only good answer strangers on the internet can give you is ask your lawyer. Read on for why this is a bad idea.

Just give the money directly to the charity.

You're already deducting the gift amount (and more) from your taxable income, it's just called "standard deduction" instead of "mortgage interest + donation + etc.".

Example (with made up numbers):
Your income is $100,000, standard deduction is $12,000. Your mortgage interest amounts to $6,700 for the year, and you would like to donate $5,000. Combined, this gives you a potential $11,700 deduction, but you wouldn't itemize because it is less than the $12,000 standard deduction. You would, however, deduct the standard deduction (i.e. the $11,700 equivalent of your mortgage interest and donation, plus more). You could then donate the additional savings from taking this deduction.

If you really want to itemize your deductions, you could always just donate more money.

Your plan of gifting money to someone else to exploit tax advantages to give more to the charity carries some risks:

The friend keeps all the money (you're out all the money, the charity gets nothing)
The friend gives only some of the money to the charity (again, you're out the whole amount)
The friend gives exactly that amount to charity, but not the additional tax savings (same for you and the charity as you giving directly, but now your friend pockets a tax deduction)
The IRS audits your friend, and determines that this is tax fraud

Using the gift exception to get more money to charity

2 Answers

Add your own answers!

Ask a Question