Fundraising proceeds aren't considered a taxable source of income. The IRS classifies the donations as gifts, which recipients don't need to report on their tax returns. Although the money you receive from the fundraiser isn't taxable, you could still owe taxes, depending on how the funds are held. People who work on the fundraising campaign may even face tax consequences.
The IRS doesn't tax beneficiaries on the money received through fundraisers. If you are raising the funds for someone else, you'll want to keep the money in a separate bank account to avoid any discrepancies with the IRS. If you do not keep the funds separate, the IRS may question where the money in your account came from, especially if you are audited. As a precaution, maintain records of all fundraising deposits to show the source of the funds. If you receive compensation in any way for raising the funds, you must report it to the IRS as earned income. You may deduct any legitimate expenses associated with the fundraising.
If the money raised is held in an interest-bearing account, the owner of the account is liable for any taxable interest. For tax purposes, banks will credit the interest to the person or entity whose Social Security Number or Employer Identification Number appears on the account. If you want to avoid the interest taxes, you can talk to the bank about setting up a non-interest bearing bank account. If there is an interest-bearing account devoted solely to the fundraiser recipient, there is no tax liability.
Chartible Deductions for Donors
If you're raising money for a recognized 501(c)(3) nonprofit organization or an established church, the donors may also be entitled to a write-off. However, donors aren't necessarily able to deduct the full amount given. The price a donor pays for food, wrapping paper, magazines or even a car wash is not fully deductible. Donors can only deduct the difference between the purchase price and fair market value. For instance, purchasing a $12 roll of wrapping paper that carries an $8 price tag in the store entitles the donor to a $4 deduction. Raffle tickets or lottery-based tickets purchased through a fundraiser are never deductible, even losing tickets. A donor can only write-off a full donation if he gives without receiving anything in return.
If a donation isn't made through a qualifying non-profit or church, it could potentially result in a tax liability for donors. Since donations to an individual are considered gifts, a very generous donation to a fundraiser could trigger the gift tax. At the time of publication, the IRS allows a single person to gift up $14,000 to an individual each year without it affecting his taxes. If he gifts more than $14,000, he won't pay taxes, but any amount over and above that is subtracted from his lifetime exclusion amount of $5.34 million. For instance, if you donated $16,000 this year to a neighborhood fundraiser for a needy family's medical bills, $2,000 of your donation is deducted from your lifetime gift limit.
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