It’s the sort of nightmare tax story many people fear. Louis Goffinet, a 27-year-old, tried to raise $200 on Facebook to help an elderly couple during the pandemic. After raising over $40,000 to support the couple, he received a bill from the IRS for $16,000, stemming from the cash that he had raised. His confusion quickly turned to fear as he tried to figure out what was happening and how he could possibly pay that staggering amount.
Unfortunately, Goffinet hadn’t documented his charitable intentions properly in the eyes of the federal government. The IRS believed that he had made this money for his own needs. They do expect a cut of all cash income, which is how these earnings were designated. Even though the funds were used for charity and not personal gain, neither Facebook, the IRS, or Goffinet himself made that distinction clearly enough.
As such, Goffinet was expected to pay this bill by the IRS. Understandably, he wasn’t sure how he would afford it. This frightening situation might be successfully resolved by proving that the funds were raised for charitable purposes and not personal gain. However, many other people may find themselves in this situation after trying to help out another person or organization in need. How can others avoid this scary scenario?
It’s crucial to understand that, while the market went bear on March 23, 2020, the S&P 500 Index has since jumped by about 75%. This means some individuals are doing quite well, but others are struggling. Social media and crowdsourcing platforms apparently make giving back to the community a bit easier, but it’s also easier to get burned in the process. When trying to help someone in need through social media fundraising, pay close attention to the fine print. For instance, you must understand:
- All funds raised by a person are subjectable to taxes
- Charitable donations may not be taxable in many scenarios
- Facebook and other social media sites are NOT liable for any taxes earned through charity
These factors are essential to consider because platforms like GoFundMe and Facebook may be used to bridge gaps in medical expense coverage. Around 30% of all healthcare bills come from a patient’s pocket, meaning that even those who have insurance coverage may find that coverage to be insufficient. What’s more, medical bills aren’t the only expenditures that can put a strain on your budget. And if you’re faced with a huge tax bill after trying to help someone else, this could negate the positive impact of any donations if you aren’t careful. Thankfully, the following tips should help you avoid this danger.
- Hire an Expert: Around 70% of all small businesses use tax preparation professionals. It’s worth hiring one of these experts for your fundraiser if you are worried about the potential dangers that a sudden IRS bill could trigger in your life.
- Create an Explicit Expectation: On the fundraiser site, make sure that you are explicit in your description about why you are raising the cash and how you plan on using it. If you can show without a doubt that it is used for charitable purposes, you aren’t likely to be responsible for taxes on what you raise.
- Document Your Fundraiser: Collect as much information as you can show how the funds were raised and spent. You’ll want receipts, various types of financial records, screenshots of the fundraiser, and more. This information should help to show that you were raising money for charitable purposes.
- Gather Testimony From Others: Gather legally binding documents and testimony from the people who receive your charitable donations. Get them to describe why the money was raised, show that they took the cash in themselves, and prove how it was used for their needs.
These simple steps will save you from a huge tax bill by showing that the cash you earned was used for charitable purposes and that you weren’t anticipating getting any for your work. The essential step here is documentation. Make sure that every step you take is generous and that you won’t be spending any of the cash yourself. In this way, you’ll be able to protect yourself and your family and help your community without getting a huge and unfair tax bill in the mail for the money you aren’t using.
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