As the War in Ukraine intensifies, appeals have gone out for financial and material support for the refugees, both inside Ukraine and those crossing the border into the European Union. In response, many people are making generous gifts to U.S charities. To be tax deductible, these gifts need to follow the rules for contributions to U.S. charities for use abroad and gifts to foreign charities.
Many organizations qualify as charities under Internal Revenue Code (IRC) section 503(c)(3) but do not qualify for an income tax deduction under IRC section 170(c), specifically foreign organizations. This is because Section 170(c) requires, that to be tax deductible, donations need to be made to organizations created or organized in the U.S. for U.S. Taxpayers. There is a list published by the IRS of all organizations that qualify under section 170(c) in Publication 78. So, a direct donation to a foreign charity, or a donation to a domestic charity that merely hands over the donation to a foreign charity, are not tax deductible.
There are ways around these restrictions, however. There are many “Friends” organizations that are formed in the U.S. with the specific purpose to raise tax-deductible contributions in the U.S. So long as the contribution is not specifically earmarked for a foreign charity or the Friends organization lacks discretion over the donated funds, the contribution to the U.S. based Friends organization will be tax deductible. The best example of a Friends organization are the various organizations supporting foreign colleges and universities.
Another alternative is an International Donor Advised Fund (DAF). Most DAFs, such as those at community foundations and those run by mutual funds and brokerage firms, generally prohibit specific requests to make donations to foreign Charities. There are, however, some international DAFs, such as the United Way Worldwide , which can make grants to foreign charities based on your advice. It is important if you’re setting up a Donor Advised Fund, to make sure that the organization has adequate screening and vetting processes for foreign Charities.
A third option, for those gifting a large amount, is to make the gift through a Private Foundation. A private foundation can make grants to foreign Charities, though there is an excise tax on such foreign grants. A private foundation is not lightly entered into. For those donors making very large donations who want ultimate control over where the donations go, a private foundation is a viable option.
Whether the war ends quickly or drags on, there will be a human cost with refugees both inside and outside of Ukraine who will need support. You can make a tax-deductible donation that will ultimately benefit them, though it may require that you do a bit of work to do so.