One of the more remarkable> offshoots of the Haiti earthquake response has been the rise in cellphone giving. Indeed, the Mobile Giving Foundation, the nonprofit which facilitates texted donations, estimates that as of Tuesday, between $25 million and $27 million had been donated to causes via texts. That number grows by the minute: At one point, Mobile Giving was processing 10,000 text messages per second.
Less noticed has been a question that eventually arises for many donors: How do you deduct a cellphone donation from your taxes? Even as the money pours in to help victims in Haiti, there is a fair amount of confusion here, largely because of the novelty of the approach. What s more, with all the publicity surrounding cellphone donations, the questions are likely to multiply not just with givers, but presumably with their accountants, too.
The big question is familiar to anyone who has ever sat with a pile of crumpled slips of paper as they hustle to meet the April 15 tax-filing deadline: Do I have a receipt? Typically, for donations to IRS-approved charities, whether made by mail, telephone or online, personal information is collected so the donor can expect to automatically receive, by hard copy or email, a receipt confirming their donation for tax purposes. That s not the case with the new cellphone approach.
Since the charity is receiving the donation second hand through the cell company and Mobile Giving it doesn t have the opportunity to collect a giver s address or email. This gap of information has created some uncertainty.
When SmartMoney first asked the IRS how these donations are handled, a spokesman directed us to Publication 526, which spells out in general terms the guidelines for documenting charitable donations. But in that publication, there is no mention of donations made by cellphone. Subsequently, IRS spokesman Marvin Robert said that the taxpayer should simply retain his or her cellphone bill as a receipt. If [donating to Haiti] involves making contributions by text messaging, [Americans] should be assured that the Internal Revenue Service will accept, as substantiation of the contribution, a copy of the telephone bill showing the text message charge, he said in an email message.
That s good news for donors, since the alternative is rather cumbersome. Typically, when a donor gives to a charity, the group automatically generates a receipt, either by email or through the postal system. Instead, with texted donations, a donor must proactively take a number of steps. It starts with going to the web site processing the payment -- for example, Mobile Giving or mGive.org. The donor then punches in his phone number and receives a text message containing a PIN code. Only after entering the PIN does the organization provide a receipt.
When we surveyed a few professional tax preparers to find out their advice on deducting cellphone donations, their advice seemed to be in line with the new IRS guidelines. Presumably, the taxpayer s itemized [phone] bill would show the texted donation the charity and the amount on the itemized charges, says Jackie Perlman, senior tax analyst at the Tax Institute at H&R Block. Bob Meighan, a CPA and vice president at TurboTax, says that the IRS requires a bank record or a written communication from the charity that shows the name of the charity and the date and amount of the contribution. In the case of donations via text messaging, the cellphone bill reflects the donation. This satisfies the requirement, Meighan says.
One potential snag: Not all cellphone bills may actually contain the name of the charity. Examples we received from Sprint and Verizon do not list that information. Here is what a donation made to the American Red Cross by texting HAITI to 90999 would look like on a Sprint statement: www.MobileGiving.org: Donation - 90999 mgf.me receipt -01/14 $10.00. (Mobile Giving declined to discuss details on how the charge appears on cellphone bills, saying they are overwhelmed with requests from wireless carriers.)
The IRS was not able to immediately clarify whether a cellphone bill that does not list the name of the charity would qualify as sufficient documentation.
The issue of how or whether many of these gifts might be deducted has obvious implications for the government in these budget-strapped times. The tax benefit of a $10 donation isn t likely to be meaningful for most individuals assuming they are even itemizing deductions rather than claiming the standard deduction, which for 2010 is $11,400 for married couples and $5,700 for single filers. But in aggregate, if a portion of the legions now giving to Haiti fail to deduct their gifts because they are not familiar with the documentation requirements (or maybe just because they tend to throw away their phone bills), a certain amount of revenue will simply remain in the government s coffers rather than go back to taxpayers.
How much? For every $100 million donated by Americans to charity that is legitimately deducted as a charitable contributions, the aggregate tax savings to those donors is estimated at roughly $25 million (assuming an average tax bracket of 25%).
Put another way, every $100 million in donations that winds up not> being deducted by those who legitimately do so leaves the government with $25 million in revenue that it wouldn t have otherwise received had taxpayers taken advantage of the deduction.
To be sure, the real-life numbers are far more complicated. About 63% of taxpayers don t itemize their deductions, so they aren t able to take the deduction to begin with, says Mark Luscombe, a CPA and principal analyst at tax and business law information provider CCH. Then, the taxpayers who do itemize tend to be in the higher tax bracket: They generally tend to be wealthier people who own homes and can deduct mortgage interest and pay enough in state and local income taxes (all part of one s itemized deductions), so when all is added up one is better off itemizing rather than claiming the standard deduction. In reality, the boost to the government for $100 million in donations would be far smaller, around $9.6 million, Luscombe estimates.
Even a major disaster like this, with millions of people making contributions adding up to tens of millions of dollars, would be a blip in the tens of billions of dollars the IRS collects each year, says Thomas Ochsenschlager, the vice president for taxation of the American Institute of Certified Public Accountants (AICPA).
Still, the numbers suggest that if this method of giving continues to boom and given the success of organizations collecting donations for Haiti, that seems likely to be the case questions may only increase. Given that the phenomenon of texting is still in its infancy, it's hard to predict the problems that could arise. But they could range from a shift in donor fatigue where people decline to give larger amounts because they ve already texted a $5 donation to a sea change in the types of philanthropies that receive the donations. Another possible development, with both upsides and downsides: Texted donations could shift giving to a younger, less affluent demographic. It is undoubtedly going to bring giving from people who are younger and potentially less-professionally established, says Barbara Leopold, coordinator of international fellows programs at the Center on Philanthropy and Civil Society at the CUNY Graduate Center. It is very likely to tap a group of people who maybe are not in the habit of giving.
Either way, donations to Haiti rescue efforts continue to gain momentum. On Wednesday, the House of Representatives passed legislation enabling taxpayers who donate cash to Haitian relief efforts through March 1 the option to claim that donation on their 2009 or 2010 returns. This will not only provide taxpayers with a more immediate tax benefit on their donations, but may also make it less likely that one loses their cell phone bill or simply forgets about their token text-message contribution.
UPDATE: Feb. 9, 2010: Mobile Giving Foundation says that charges on cellphone bills appear either as a donation to MGF or to the individual charity.