Eligibility
"A charity must be registered with the Internal Revenue Service (IRS) to be eligible for deductions on contributions. Just because a charity is registered in India, it does not make it exempt for US tax purposes," says Vinay Navani, a CPA and Shareholder at New Jersey based firm Wilkin & Guttenplan, PC.
What this means is that if you donate to an Indian charity directly, you will not be able to avail of a tax deduction on your US tax return. If you have significant income within India and you pay taxes in India, such a donation can get you a tax break in your Indian tax return under section 80G but not on your US tax return.
If you want to make a donation to an Indian cause and also get a tax deduction in your US tax return, there's a simple way to do it. "There are several US registered charities that operate in India. You can contribute to them and get a tax break on your US tax return," Navani explains.
Some of these charities include India Development and Relief Fund (idrf.org), Pratham USA(prathamusa.org), Asha for Education (ashanet.org), Seva Foundation (seva.org), Sankara Eye Foundation USA (giftofvision.org), Association for India's development (aidindia.org), American India Foundation (aif.org). These are all registered with the IRS and channel their funds to causes in India.
You can find more charities here. You can also get their IRS registration status here.
Deduction
Charitable contributions are deductible on your US tax return only if you itemize your deductions on Form 1040 schedule A.
For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain a record of the contribution either by way of a bank record or a written communication from the qualified organization. If you donated gifts in kind, you generally can deduct the fair market value of the property. For any contribution of $250 or more (including contributions of cash or property), you must get a written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed.
You must fill out Form 8283, and attach it to your return, if your deduction for a noncash contribution is more than $500. If you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A. If you claim a deduction for a contribution of noncash property worth more than $5,000, you will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B. If you claim a deduction for a contribution of noncash property worth more than $500,000, you also will need to attach the qualified appraisal to your return.
Limits
For all public charities, the deduction is limited to 50% of your adjusted gross income. This limit applies to the total of all charitable contributions made during the year. To all other organizations, the deduction is limited to 30% of adjusted gross income.
Want to support another cause?
If you would like to support a specific cause such as making donations to a temple in your town or supporting a particular school in your village, there might not always be a public charity that supports the same. In such cases, you can set up your own charity in the US that will support a specific cause in India. More about this in the next piece below.
Indian-Americans: Start your own charity to support a cause in India
In an earlier article, we saw how you can contribute to Indian charities and avail the benefit of a US tax deduction at the same time. But what if none of the popular charities in the US support the cause you would like to support? Well, you can start your own.
For instance, the IIT Bombay Heritage Foundation was established as a non-profit organization to assist the Indian Institute of Technology, Bombay, the students, faculty, employees and alumni. AIIMSonians of America, is a similar non-profit that comprises of professionals from various medical fields, all of whom earned their degrees from The All India Institute of Medical Sciences, at New Delhi. These non-profit organizations were formed for the purpose of giving back to the alma mater.
"A contributor may not always find an existing non-profit that supports the same cause or activity that he or she would like to donate to. In such cases, they can set up their own non-profit and get IRS approval for the same. This is a common practice among those who would either like to give back to their educational institutes or to a religious organization of their choice in India," says Vinay Navani a CPA and director of tax at New Jersey based firm Wilkin & Guttenplan, PC.
Having said that, while such non-profit organizations can be formed, the ultimate use of funds is determined by the board of trustees. Navani explains, "Under US rules, the domestic charity can't be committed to give to a particular foreign organization. It can be formed with the intention to support a specific organization but the US Board of Trustees must make an independent determination that the Indian organization qualifies under US rules."
So what does it take to set up your own US based charity and what should you look out for?
Type of organizations that can qualify
An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes:
Religious
Charitable
Scientific
Testing for public safety
Literary
Educational
Fostering national or international amateur sports competition
The prevention of cruelty to children or animals
Examples include: Non-profit old-age homes, parent-teacher associations, charitable hospitals or other charitable organizations, alumni associations, schools, chapters of the Red Cross, boys' or girls' clubs, and churches.
To qualify, the organization must be a corporation, community chest, fund, articles of association, or foundation. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify.
Remember
Set-up process
Step 1: The basics
The basics include:
Identifying a cause
Selecting a name and checking with the State Corporation Office to see if the name is available
Formulating your mission statement
Step 2: Incorporation
You will need to draw up the Articles of Association and bylaws. "The organization must be set up under state not for profit statute. I strongly recommend using an attorney experienced in non-profit organizations," Navani advices.
File the articles of association with the state corporation office
Step 3: Tax formalities
First you would need to get an employer identification number. this is similar to an individual's social security number.
Then you must apply for federal and state/ local tax exempt status as a private foundation. You would need to fill up Form 1023 or 1024 depending on the type of your organization.
"This is, by far, the toughest and most expensive part of the process," Navani says. The form runs into 26 pages with questions that require detailed answers. You must attach all the correct documents along with the application to make sure the process is smooth.
The user fee per application is $400 for organizations whose gross receipts do not exceed $10,000 or less annually over a 4-year period and $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year-period.
Further, it takes about a year to be approved. "The organization has to figure out how to operate while it is waiting for the approval to be received from the IRS. Most organizations say 'IRS tax exempt status is pending'. The donor shouldn't claim a tax deduction until IRS status is approved. Also, the organization needs to under the documentation rules it must follow when other people give contributions," Navani adds.
To sum up, all this effort and costs might make sense only for someone who is looking at donating amounts upward of $10,000. There is also an ongoing commitment of time and expense to comply with annual filing requirements at both the federal and state level, so make sure you have your homework in place before you get started.
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