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Tuesday, January 02, 2007

Tax deductibility Status of Certain Tzedakah

In my last post about making a year analysis of where our tzedakah funds ended up going versus our goals of where we would like them to go, I received a question that deserves a follow-up post because it represents one of many legal misconceptions and potential pitfalls when it comes to filing tax returns.

An anonymous commenter asks:
"Do you actually donate to K-12 schools or do you consider your tuition, which is tax deductible, your tzeddakah?"

As tuition is NEVER tax deductible on a Schedule A* as a "charitable contribution," I believe this commenter was asking if we donate beyond what many schools require in "donations" if your child is going to be a student in their school, which I will call "tuition extras." The short answer is yes, this is our primary charitable priority, but is basically irrelevant to the topic of this post.

Many schools divide their tuition statements up into numerous components: tuition, textbook fee, activity fee, scholarship fund, synagogue fee, script fee, and banquet fee. Some expenses are per child, others are per family. I believe, and others concur, that the schools try to lessen the blow of tuition by making some the components "charitable."

The problem is that from a legal standpoint, these tuition extras are NOT considered charitable, and as such as not tax deductible. IRS Publication 526-Charitable Contributions states:
"Tuition, or amounts you pay instead of tuition, even if you pay them for children to attend parochial schools or qualifying non-profit day care centers. You also cannot deduct any fixed amount you may be required to pay in addition to the tuition fee to enroll in a private school, even if it is designated as a "donation."

If you aren't hiring me to do your taxes, I cannot tell you what to do. But, consider yourself forewarned.

Now you might be asking: is there anything else that I might assume is deductible which isn't? (Possibly).

Common fund raising techniques in the Orthodox Jewish world include banquets, concerts, theatrical performances commonly put on by girls' schools, the very popular "Chinese Auction," and raffles. I will give my analysis of each one below.

IRS Topic 506-Contributions states: "If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received."

The tax deductible portion of the banquet fee is usually accounted for by the organization that hosts the banquet and, as such, is straightforward. Where the organization does not provide such documentation, an honest assessment of what the Fair Market Value (FMV) of such a meal would cost you in an equivalent setting is in order.

Admission to frum fundraising concerts and theatrical performances are more complicated, since I've rarely seen these organizations provide you with a base amount beyond which everything else is deductible. As nearly all public performances of frum Jewish Music concerts are put on by charitable organizations, it is difficult to determine what the FMV would be in the "real world." If you want to play it safe, I would consider the lowest priced ticket to be FMV and any amount paid beyond that to be charitable, unless you can find an equivalent performance to help determine value. Theatrical performances are often put on by public high school also, and therefore, I believe one could compare ticket prices and assume any additional cost is charitable.

The extremely popular "Chinese Auction," as well as raffles, are considered gambling by the IRS, and as such are not at all deductible (although if you do win and claim your winning as income, you can take your losses too). The IRS does not assign a FMV to gambling and considers whatever the consumer pays to be the FMV:
"Costs of raffles, bingo, lottery, etc. You cannot deduct as a charitable contribution amounts you pay to buy raffle or lottery or to play bingo or other games of chance."


Sorry to be the bearer of bad news. But, if you are the victim of an IRS audit, you might thank me. :)

Please see: IRS Topic 506-Contributions , IRS Publication 526-Charitable Contributions.

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*Tuition for pre-school, as well as for before and after, and camps may qualify for the the Child and Dependent Care Tax Credit, subject to certain regulations and limitations. In short, one may take a tax credit which amounts to 20-35% of the for qualified child care expenses of up to $3000 for one child or $6000 for two or more children, which amounts to a credit of $600-$1050 for one child or $1200-2100 for two or more children.

25 comments:

Ariella said...

that's why I prefer to just give a donation to buying participation in raffles, etc. While you may consider it tzedaka for your own account of ma'aser, it does not count as a tax deductible contribution.
So let me just clarify: as the fund-raising obligation is an obligtion for the parent of the child in yeshiva, it should be considered not a deductible donation. But what is the status for another individual who contributes money on behalf of the parent who has an obligation to bring in funds but not necessarily out of his/her own pocket. As the other party was under no obligation, does s/he get full credit tax-wise?

SephardiLady said...

Ariella,

I assume you are asking about when a another party (family A) donates money to a school so that a different party (family B) can meet their fundraising requirement.

A donation that benefits another individual (Family B), even if it is fulled through a 501c3, is NOT tax deductible.

However, I'm aware that this does take place. But, it is not a legal deduction. For the deduction to be legal it need to:

1. Be voluntary.
2. Benefit the 501c3 as a whole or a specific fund, but not a specific individual.

SRosen said...

In my kid's school there is a $1500 obligation per family for each year's dinner journal. You can either pay it fully or get business to place ads and cover your account.

There have been years where I had to pay part or all of this obligation and the school sent me a tax reciept for this amount. I always felt that if they sent it, I would claim it on my taxes since they would not stick their neck out if it was questionable.

The other week I was talking to an accountant and he said it all comes down to the question of whether they would allow your kids back in school the next year if you did not meet this obligation. If yes, then it is truly a donation. Perhaps a coerced one, but in was not mandatory.

If, however, your kids would not be allowed back since they would consider this part of the previous year's tuition obligation then it can not be counted as a donation for tax purposes.

Ariella said...

Sephardi Lady, you were right about my assumption of who is paying for whom.
With respect to srosen: I believe that schools do tend to be overgenerous with tax receipts. Some even provide one for the full price of the dinner. For tax purposes, if one goes to a school dinner to donate to the cause and not b/c one is obligated by school contract, then one can take as deduction only the amount above actual value of the meal IIRC. So if the dinner for 2 is worth $100 and the person pays $500, only $400 of that can be claimed as a tax deduction. I once heard a rabbi say that for tzedaka, on the other hand, you can consider any amount above what you would pay for your normal dinner (say $20 or so) to count as tzedaka. But the IRS has different standards.
If a business places an ad in a journal, it really is not a tax deductible donation b/c it does get something for the money. But advertising is, in fact, tax deductible as a business expense.

srosen said...

Ariella - I understand in theory how you would calculate the actual donation part of the money, but, in reality, how the heck do you determine the cost of the meal portion?

The school did give a receipt for the the full amount that was paid. I'm just surprised that schools would do something like this that could potentially land them in trouble with the IRS.

Ariella said...

srosen, actually the school would know its cost per meal. In fact, they sometimes extend special invitations for people to come paying just their costs. You could estimate based on catering costs in the area. I don't know if you need to know exactly.

Related to this topic, I was struck today by how much people work at evading taxes. I once posted on this topic of evading sales tax. Today I was in a high-priced florist (not buying, I assure you.) He was on the phone with someone who wanted to get out of paying the sales tax on his substantial order. The florist declared he has to put down at least half to show the sale. He said that he'll put it down as $4000 inclusive of tax, but if the order gets larger,(as he clearly expected it to) he would have to increase that number.
Instead of robbing the government, the person could have ordered flowers elsewhere from a less expensive florist, rented silk arrangemetns, or even chosen cheaper flowers from the same florists. All those are legitamete options to curtail costs. Falsifying the sale record to save on sales tax is not. But clearly this is commonplace from the way the florist (not a frum Jew, BTW) was speaking

SephardiLady said...

SRosen-Welcome and thanks for participating. Unfortunately, there are plenty of things done in our own day schools and yeshivot that are "questionable" from a legal standpoint (And, I'm putting that nicely :)

I like your accountant's take on donation vs. tuition.

As for calculating the cost of dinner, there are two methods that I think are satisfactory:

1. The organization divides the cost of putting on the event by the number of attendees for a per head cost.

2. The donor or organization makes a good faith estimate of what they would pay for an equivalant meal in a resturant that offers similiar fare.

Ariella-Thanks for the halachic info. I think we have only once spent more than $50 for a meal for two. Our whole eating out budget for the year is what it would cost us to go to one banquet! So, I wouldn't be too happy if poskim told me the dessert wasn't ma'aser when I think we have only ordered dessert once in a resturant. :)

And people definetely go to all lengths to evade tax. Personally, keeping one set of records is enough work for me.

a mother in israel said...

It seems as if the commenter was assuming thatif a donation is tax-deductible, it must count as tzedakah, but that is not necessarily the case. And vice versa.

Mike S said...

It is not the amount over the cost of the dinner that is deducatable but the value of any goods and services received. So if the caterer, for example, donates the food, you still have to subtract its value from the donation. And if you take home the centerpiece, you have to subtract it's value as well. On the other hand, if you don't take home (or get pleasure from viewing) the centerpiece, the fact that the dinner committeee may have foolishly paid a huge sum for the hideous thing doesn't reduce the amount you can deduct.

The reson you can't deduct anything if the dinner is a requirement for sending your kid to school is that you then receive instruction as well as a dinner in exchange.

SRosen said...

one more comment . . .
I think many people claim these deductions on their taxes because they just assume that if the school sends them a receipt it must be ok. so it is really an honest mistake.

Another option, that goes along with ariella's notion that people always try to evade taxes, is that people figure they will submit it and play dumb if they get caught. they can easily claim that they had no reason to believe it was not acceptable and then just pay the applicable taxes at that point.

SephardiLady said...

Mike S-You are correct about value vs. cost. I was only listing satisfactory methods of estimating that value.

While Ariella was seen receipts that low ball the value. . . . I've seen receipts that do the exact opposite. Quite frankly, the value of the 3 course meal is NOT over the $100 the school claims it is per person. But, they are coming to that figure, I imagine, through method 1 which we call (the lazy method).

I guess no caterers of banquets we've been pressured to attend have donated their services.

SRosen-I imagine most people could play innocent if caught. I've received tax receipts for Chinese Auctions and didn't think twice until I was getting more heavy into indivual tax and hit upon some clearly stated things.

But, in our house, playing dumb won't work and would cause more harm than good. :)

I personally wish that organizations would not send tax deductible letters for things that are NOT deductible. It makes explaining the illegality of the whole thing more difficult.

SephardiLady said...

I was only listing satisfactory methods of estimating that value.

I actually shouldn't say satisfactory, as I don't consider #1 to be that satisfactory. But, it is used a lot.

Anonymous said...

As the writer of the original post, I just want to clarify: I live in Israel and have never sent my kids to American day schools.

Anonymous said...

but here's another question, on an ideological level would most parents consider their tuition payments as part of their 10% charitable donations (which they are required to give halakhically).

SephardiLady said...

Anonymous-I should thank you for providing a great posting topic, even though it is irrelevant to you as an Israeli.

Regarding your question above, from my learning, the subject is a complicated one. If a parent is paying beyond the cost of educating their child and they are struggling, a posek might allow ma'aser to be used for tuition under certain circumstances. I have heard that other poskim say no.

What do the majority of parents do? I don't really know, but imagine that with the struggles tuition makes people face, many parents would have no problem considering their ma'aser requirement taken care of by tuition alone.

David said...

I have heard of schools which set up a synagogue, and give dramatically reduced tuition costs to people who "join." Then the synagogue will send tax letters for the amount of their membership (as most do), without accounting for the fact that membership is actually granting something valuable...

SephardiLady said...

David-I believe that maybe shuls do this for their own in house pre-schools (ours does). There is a benefit of value to those who take that benefit. But, I do not believe it is illegal to offer a reduced price to a synagogue school for members.

I re-read the Pub 526 that I linked to in the post and don't see any example on this very common practice.

I know for a fact that Catholics who are members of a certain diocese get significantly reduced tuition at their diocese's school. I have heard that the Mormon church discounts tuition at Brigham Young University for LDS members, but not others.

I think it is perfectly fine to take that tax write-off. There is no "quid pro quo" because ALL members are entitled to the benefit whether they use it or not. Shuls, of course, entice members to join with this benefit. It is often just good marketing since people may stay members for 30 years to come.

What I do not believe is legal to take is a tax write-off when a school forces a parent to pay for a membership to the school's own shul as part of tuition. When this donation is really part of the tuition cost, it cannot be deducted. (See SRosen's accountant's distinction above which I think is on the money).

Ariella said...

Exellent discussion and comments on this post! I just want to clarify: I don't think that all people attempt to evade tax, though it is a common phenomenon, especially when large sums that would entail hundreds in sales tax are involved. Hence the many cash transactions for jewelery, silver, flowers, catering, and, especially, contracting services. When we starting getting quotes from caterers for my son's upcoming bar mitzvah, one said that we should give him cash in order to save the sales tax. It's up to him to collect the sales tax, no matter what method of payment we use. But he really is after saving himself income tax by not recording the transaction as income.

David said...

Sephardilady,

I think it's perfectly legal to offer reduced rates to members, but wouldn't that affect the tax deductibility of the memberships?

That IS a tangible benefit which is received by members but not by non-members.

A related example would be the tax deductibility of high holiday seating tickets. If people are allowed to come in and pray regardless of a ticket, then the price would definitely be deductible. If not, then the ticket has a fair-market value (much the same way that a ticket to a baseball game has value), and either the member (who paid the lower rate) doesn't get to deduct any of the ticket price, and the nonmember gets to deduct the difference in prices, or the whole amount is deductible, and the member's membership loses its completely deductible status.

Mike S. said...

There is an exception when the "goods and services" received are purely of religious value--e.g. permission to pray. Thus the High Holiday seats are, I think, deducatble in their entirety even if someone checks tickets (something I have never seen in an Orthodox shul.) I think the same would probably go for Mikveh fees.

David said...

That exemption is only for amounts < $75, or for amounts greater than $75 if the donation is non-compulsory. I think Orthodox shuls could make a strong argument that they don't actually check tickets, and thus the ticket has no true "value."

SephardiLady said...

Mike S answered the question well. I'd been throwing around ideas for something pshat, but the bottom line is that the IRS allows deductions when the value is purely religious.

As such, we deduct for high holiday tickets. But, I have never deducted for mikvah fees. Although the service is religious, I have always thought of it as a fee for service, although the mikvah would never turn someone away.

nombody said...

Regarding the scholarship fund, what some schools have done is say that the scholarship fund is voluntary, and they won't go after you to pay or prevent you from re-registering, BUT if not enough parents pay the scholarship fund then they will make it as tuition next year.
Since most everyone can use the tax deduction, compliance is therefore pretty high, though in theory there is an incentive for parents of children in their final grade to not pay the scholarship fund.

miriam said...

I think we deduct Mikvah Membership, but not the per use fees. (Yes, our smallish community has both, because per use fees are not enough to support the mikvah.) And we specifically chose a level of membership that did not include tevilas nashim, so that it wouldn't be a question.

But as for the "fund-raising requirement:" Our school does have one. Each family has to "raise" x number of dollars. I'm very sure the money collected goes into the general yeshiva fund, although it is counted off against our "requirement," and if we don't "raise" enough, we do make up the difference ourselves. I know the people who contribute (with it marked as the donation coming because of us) get the standard "no goods or services" letters, and I'd thought it was a separate requirement and not part of tuition purposely to make it "count" as charity. It's not like our friends and relatives are helping to pay our tuition (which would surely be ma'aser for them, I'd assume, but not "charity" for the IRS), or at least I had assumed it wasn't. This concept that it wouldn't be is very confusing... and I think a lot of those donations might stop if they thought it wasn't actually tax-deductible!

We and our relatives have specifically not participated in the annual Raffle (we had to argue with the school that donations coming in then were not for raffle tickets!) because they are not tax deductible and we'd rather give a tax-deductible donation instead.

I do not cheat on my taxes. I'm even including some barter business income this year, because the IRS says I have to. I really don't want to hear that the fund-raising requirement isn't tax-deductible, because then I'll feel morally obligated to pay all of it myself to keep my relatives' donations deductible for them.

Anonymous said...

I know I'm revisiting a long-dead topic, but I found your blog googling for info on deducting Chinese Auctions donations.

I understand that the letter of the IRS regulations doesn't allow chinese auction contributions to be deducted, as you're entering games of chance and your contribution gives you a chance to win, even if you don't.

But theoretically, if an organization provides a caveat in their official rules: No purchase necessary; you can enter the chinese auction or raffle by writing or calling our offices, etc. - would that justify the deduction to the IRS on the grounds that your contribution wasn't really necessary to enter the contest?

Thanks for your thoughts,
Heshy