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How to Give a Scholarship and Get a Tax Write-Off Key Takeaways:
- Donating to a tax-exempt organization that gives out scholarships might make you eligible for a tax deduction.
- Both cash and noncash contributions are eligible for a tax write-off.
- To receive a tax write-off, you must itemize deductions on your personal tax return.
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Have you always wanted to create a scholarship fund but weren’t sure how to grant funds in the most tax-efficient way?
If so, this article is for you!
According to the Education Data Initiative, the average cost of college in the United States is $36,436 per student per year, including books, supplies, and daily living expenses.
As such, creating a scholarship fund can be a powerful way to make a difference while also enjoying potential tax benefits.
By understanding the ins and outs of tax-deductible contributions, you can contribute to a brighter future for deserving individuals while lowering your tax bill..
How to Give a Scholarship and Get a Tax Write Off: IRS Rules
To be eligible for a write-off, you must make a charitable contribution to a scholarship fund organized as a qualified tax-exempt organization.
For instance, if you create a qualified tax-exempt organization in Year 1, make a $5,000 charitable contribution in Year 2, and grant $2,000 in scholarships in Year 3, your $5,000 Year 2 contribution could be tax-deductible.
Under IRS Code Section 170(c), qualified tax-exempt organizations can include organizations “organized and operated exclusively for charitable or educational purposes.”
So, a scholarship fund that provides merit, cultural, need-based or other types of scholarship funds to students is eligible for tax-exempt status.
To establish a scholarship fund that qualifies for tax-exemption, you will have to complete IRS Form 1023 (or Form 1023-EZ for small organizations), an extensive online application for tax-exempt status.
You will also need to complete applicable state and charitable solicitation forms. Consider working with a nonprofit attorney to confirm you complete all initial compliance requirements.
Or, you can skip all of the complicated tax and legal work and choose a few alternative options.
How to Give a Scholarship and Get a Tax Write Off: Alternative Options
Instead of creating your own tax-exempt organization, you can set up a tax-deductible scholarship fund these three alternative ways:
- Use a Fiscal Sponsor
- Set Up a Scholarship Fund Through Your Alma Mater
- As long as your alma mater or its affiliated scholarship organization is organized under Section 170(c) Internal Revenue Code).
- Create a Scholarship Through a Community Foundation
Contributions to each of the options listed believe are eligible for a charitable tax deduction.
To learn more about these alternative options, check out “3 Tax-Deductible Ways to Create a Scholarship Fund Without Starting a Nonprofit.”
Cash Contributions
Cash donations to a nonprofit that grants scholarships, a fiscally sponsored scholarship fund or other organization qualified under section 170(c) of the Internal Revenue Code are normally deductible up to 60% of your adjusted gross income (AGI).
So, if your AGI is $60,000 and you contribute $40,000 to a scholarship fund, your tax deduction is limited to $36,000:
60% x $60,000 = $36,000.
To ensure that your donations qualify for a tax deduction, it is crucial to keep detailed records of the amounts donated, the dates of donations, and any supporting documentation provided by the charity, such as receipts or acknowledgment letters.
These records will be essential when you file your taxes and itemize your deductions.
Itemizing Deductions
On your personal tax return, you have the option to take the standard deduction or itemize your deductions.
Itemized deductions include charitable contributions, property tax, mortgage interest, and more.
To itemize your deductions, the sum of all itemized items must be greater than the standard deduction.
So, if you are a single taxpayer and your standard deduction is $13,850, the sum of your charitable contributions, mortgage interest, property taxes and other itemized items must be greater than $13,850 in order for your charitable contributions to be deductible on your current year tax return.
If the sum of your itemized deductions is below the standard deduction, you will not be able to deduct charitable contributions on your tax return.
Five-Year Carryforward
If your contribution to a scholarship fund exceeds your AGI threshold, IRS Code Section 170(b)(1)(D)(ii) allows you to carry forward the excess contributions for up to five years.
Under this carryforward rule, the extra $4,000 from the example above could be carried forward for 5-years:
$ 40,000 Charitable Contribution
-36,000 AGI Limit
$ 4,000 Charitable Contribution Carryforward
Noncash Contributions
In addition to cash donations, you can also make noncash contributions that are tax deductible.
Noncash contributions include items such as stocks, real estate, or other assets of value.
Similar to cash contributions, your tax-deduction will be limited to a percentage of your AGI. That percentage will vary depending on the type of noncash item you donate and the type of charitable organization to which you donate.
If you’re considering donating noncash items, it’s essential to determine the fair market value of the donation and obtain proper documentation to support your contribution.
Moreover, noncash donations of vehicles, items valued greater than $5,000, art work and other large noncash gifts will require additional disclosure on your personal tax return.
Keep in mind that the rules for noncash donations can be more complex. Seek guidance from a licensed or certified tax professional to ensure compliance.
Giving Scholarships with Donor-Advised Funds and Private Foundations
Not all qualified tax-exempt organizations can give scholarships to individuals.
Two organizations that cannot make grants to individuals are Donor-Advised Funds and Private Foundations.
Donor-Advised Funds
A Donor-Advised Fund (DAF) is a charitable giving fund that a donor establishes with a public charity.
With a DAF, donors can make charitable contributions into the fund and receive an immediate tax deduction. Over time, a donor can recommend how those funds are distributed to various charitable organizations.
Donor advised funds are allowed to grant funds to other qualified charitable organizations, but not to individuals.
For instance, with a Donor Advised Fund, you could recommend a donation to the San Francisco Foundation and direct your gift towards UC Berkeley’s African American Initiative Scholarship.
You could not, however, give directly to an African-American scholar via your Donor Advised Fund.
Private Foundations
A Private Foundation is a nonprofit organization established and funded by an individual, family, or corporation to support charitable activities. Private Foundations typically operate by distributing funds to other nonprofits.
The Bill and Melinda Gates Foundation and The Rockefeller Foundation are examples of Private Foundations.
Private foundations can only make grants to individuals if –
- The Foundation receives prior approval from the IRS, and
- The scholarship meets specific requirements defined by the IRS.
Grants to individuals that fail to meet the above criteria can subject the Foundation and Foundation Managers to a federal excise tax.
Benefits Beyond Tax Savings
While the potential tax benefits of contributing to a scholarship fund are compelling, the impact of your contributions goes far beyond the financial realm.
By supporting education, you can empower that first-generation Haitian college student looking to push forward his family’s economic mobility, reward that 4.0 high school senior who has worked extremely hard since grade school or help a future electrician pay for his vocational education.
Creating a scholarship fund is an incredible (and tax-efficient) way to make a meaningful and lasting gift that can change someone’s life for the better.
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