Charitable giving is a way for American expats to contribute to causes they care about, even while living abroad. However, the process and tax implications of charitable donations is different for expats compared to living in the US, and it can vary depending on your country of residence, local tax laws, and financial situation. It’s a question that often comes up when expats first move abroad – whether they can continue contributing to the same organizations as before – but it’s equally relevant to Americans already residing overseas. In this article, we outline seven effective charitable giving considerations and strategies for Americans living abroad.
1. Understand the US tax implications
Tax deductions
In the US, charitable donations are generally tax-deductible, potentially reducing your taxable income. To benefit from these deductions, donations must be made to qualified 501(c)(3) organizations from your Adjusted Gross Income (AGI). As an expat, you are still required to file US taxes annually. To claim charitable deductions, you must itemize your deductions on Schedule A. Be sure to keep detailed records of all donations, including receipts and bank statements, to support your claims.
Note though that many expats claim the Foreign Earned Income Exclusion (FEIE), which reduces their Adjusted Gross Income, often to zero, which in turn limits or removes the tax advantage of making charitable deductions for expats. Expats who claim the Foreign Tax Credit (FTC) on the other hand don’t reduce their Adjusted Gross Income, so can still claim charitable donations as a deduction.
Foreign donations
Generally, donations to foreign organizations are not tax-deductible in the US unless the organization is recognized as qualified by the IRS. Most foreign charities are not considered qualified organizations for US tax deductions. However, certain charities in Canada, Israel, and Mexico do qualify. For details on which foreign organizations are eligible, refer to IRS Publication 526. However, donating to a charity in your host country may still be a beneficial tax-efficiency strategy for your local tax situation.
Cross border donations tax strategies
If you’re a US expat with US tax liability and wish to donate to a charity abroad and claim the donation as a tax deduction, you have several options:
- Give to US-based charities that work internationally. Many are organized as “Friends of” groups, making donations tax-deductible in the US
- Utilize specialized charities that facilitate deductible contributions to non-US charities through equivalency determinations.
- Use Donor-Advised Funds (DAFs) that can support non-US charities. (more on this below)
- Give to qualifying foreign organizations in countries like Canada, Mexico, and Israel.
For bequests, gifts made upon death to charities can reduce US estate taxes and, in some cases, local estate or inheritance taxes in countries due to treaty provisions (e.g. Canada, Denmark, France, Germany, Greece, and Sweden). Always consult with tax experts in both the U.S. and your country of residence to seek advice tailored to your situation.
2. Understand IRS rules for cash and non-cash contributions
In general, for cash donations, you can deduct up to 60% of your Adjusted Gross Income for contributions to public charities in 2023 or 2024, while donations to private foundations are limited to 30% of AGI. The total deduction for combined donations to both public and private charities cannot exceed 50% of AGI for the tax year. Deductions for excess contributions can be carried forward for up to five years.
For non-cash contributions, such as appreciated stocks, real estate, or art, you can deduct up to 30% of AGI for public charities and 20% for private foundations based on the asset’s fair market value. This allows you to avoid capital gains taxes that would apply if you sold the asset. If the asset’s gains are modest, you might choose to value the gift at its original cost basis and apply the cash contribution limits (50% for public charities and 30% for private foundations). For donations of other types of property, like vehicles or business assets, consult IRS Publication 526 for detailed valuation and substantiation guidelines.
3. Choose the right charities
When selecting a charity, consider factors such as the organization’s mission, financial health, and transparency. Websites like Charity Navigator, GuideStar, and BBB Wise Giving Alliance provide ratings and detailed information about nonprofits to help you make informed decisions.
4. Implement effective giving strategies
For larger donations, there are several structures you might consider donating through to maximize the tax benefits:
Qualified charitable distributions (QCDs)
A Qualified Charitable Distribution (QCD) allows individuals over 70½ to donate up to $100,000 directly from their IRA to a charity without increasing their Adjusted Gross Income (AGI). This method can be more tax-efficient than withdrawing funds and then donating, as it can reduce taxes on other income and meet Required Minimum Distribution (RMD) obligations.
Private foundations
Private foundations offer flexibility in charitable giving but come with significant legal, compliance, and administrative costs.
Donor-advised funds (DAFs)
Donor-Advised Funds (DAFs) provide a more accessible alternative to private foundations. Managed by public charities, DAFs allow donors to make tax-deductible contributions and advise on how the funds are distributed over time. However, DAFs cannot receive QCDs.
Pooled income fund
A Pooled Income Fund allows donors to contribute to a shared account managed by a nonprofit. The fund grows over time, providing income to contributors, with remaining assets going to the charity after their death.
Charitable lead trust (CLT)
A Charitable Lead Trust provides income to a charity for a set period or until the donor’s death, with remaining assets going to non-charitable beneficiaries. It offers income tax benefits, reduces estate taxes, and avoids capital gains tax. CLTs are irrevocable, costly to maintain, and the assets remain part of the estate.
Charitable remainder trust (CRT)
A Charitable Remainder Trust provides income to beneficiaries for a specified term or until the donor’s death, after which the assets go to charity. It offers income tax benefits, avoids capital gains tax, and keeps assets out of the estate.
5. Be mindful of local and currency considerations
Host country regulations
Be aware of the charitable giving regulations in your host country. Some countries offer tax incentives for donations to local charities, while others may have restrictions. Understanding these regulations as well as any possible crossover with US tax benefits can help you maximize your impact and local tax benefits, as well as ensuring compliance.
Currency and payment methods
Consider the currency exchange rates and fees when donating internationally. Some charities offer options to donate in different currencies or accept various payment methods, including online platforms such as Wise, which can simplify the process and reduce fees.
6. Stay compliant and organized
Keep thorough records of all charitable donations, including receipts, bank statements, and correspondence with the charities. This documentation is essential for tax reporting and ensuring that you can substantiate your deductions if required.
American expats should also ensure that charitable contributions are deducted in the year they are made. For example, if a donation is made on December 21st, 2023, it can be claimed on the 2023 tax return, even if the payment is processed in early 2024. The key is that the donation must be received by the charity in the same year to qualify for that year’s deduction. It may be preferable if the end of the year is approaching to make the payment before December 31st, or to defer it to the following years, depending on your overall tax situation.
7. Consult professionals
Consult with tax and financial advisors who specialize in expat issues to better understand and optimize your donations as an expat. They can provide personalized advice and help you get the most of your giving strategy, while ensuring compliance with both US and local regulations.
Final thoughts
Given the complexities of multiple tax systems, seeking advice and careful, regular reviewing of your charitable strategies will help you ensure that your charitable contributions remain both impactful and tax-efficient.
If you have any questions about financial planning or investing as an American living abroad, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
