“Charity begins at home” is a popular phrase often used to encourage donations to local charities. But for a nation nearly 1 million people immigrated to and more than half a million new American citizens were naturalized in 2004 alone, according to Department of Homeland Security statistics, home may not always be the United States. Even Americans who are born here may have strong connections to other countries or feel compelled to contribute to foreign charities in the wake of such disasters as tsunamis and earthquakes.
Interest in international charitable giving has increased to the point that it has become a significant tax planning issue for many financial advisors, estate planners and accountants.
The challenges of international giving is explored in great details by attorney Richard L. Fox in his article Planning for Contributions to Foreign Charities by Individuals and Foundations published in the July issue of Estate Planning.
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According to Fox, one of the primary issues tax planners must address regarding charitable contributions is deductibility. Not all charitable contributions are tax deductible. In fact, most contributions to foreign charitable organizations are not. Internal Revenue Service (IRS) Publication 78, the Internal Revenue Service (IRS) states that charitable donations are deductible if: they are made to qualified organizations. Qualified organizations are essentially charities, non-profit organizations and religious organizations that are “organized or created in the United States or its possessions, or under the laws of the United States, any State, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.” The IRS also provides a searchable online list of qualified charitable organizations at http://apps.irs.gov/app/pub78.
Therefore, the easiest way for most individuals to make contributions to foreign charities is to donate to domestic charities or donor-directed funds involved with international efforts or programs as Fox suggests. Groups such as the International Red Cross/Red Crescent, Oxfam and Feed the Children are among the biggest international names, but there are many others. Americans making donations to domestic charities active internationally can expressly designate the programs to which they want their gift to benefit so long as they do not specify a foreign charitable organization and still deduct the contribution from their federal income taxes according to Fox.
Individuals wishing to donate a significant sum to foreign charities may find creating and funding a domestic private foundation more suitable than trying to contribute through domestic organizations. Although there are no restrictions other than applicable Chapter 42 excise taxes on donations or grants made by private foundations to foreign charities, there are some specific rules which must be followed according to Fox.
In addition to the tax considerations, individuals wishing to make donations to foreign charities and their advisors should also be aware of the anti-terrorism provisions that were implemented after the September 11 attacks. Individuals and private foundations found to be in violation of these provisions may be subject to civil penalties, fines, the freezing of assets and even criminal prosecution.
The Patriot Act and Executive Order 13224 are intended to disrupt the funding of “individuals and entities that commit, or pose a significant risk of committing, acts of terrorism,” by blocking their access to assets according to Fox. Along with these legal provisions the Treasury Department and has issued guidelines regarding international charitable donations. The guidelines are voluntary which is fortunate because Fox explains they have been rejected by most American charities as unworkable. The IRS, however, has issued statements indicating they intend to clarify and expand existing guidelines according to Fox.
The complexities of issues affecting international charitable giving demand that both advisors and donors themselves scrutinize every aspect of the donation to ensure that all relevant laws and regulations are complied with. That said, charity can begin at home. Wherever home is.