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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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I am setting up a benefit account at a local bank for my ...

Resolved Question:

I am setting up a benefit account at a local bank for my sisters family. Her 12 yr old son is fighting cancer and they both can't work. We are collecting funds for them for living expenses. Is the money we collect taxable income to them?   Are the contibutions people donate auotmatically tax deductible? Do we need to apply for any special tax ID numbers.
Submitted: 10 years ago.
Category: Tax
Expert:  Christopher Phelps replied 10 years ago.
The money you collect from individuals for them will be considered as non-taxable gifts. Thus, they do not have to report the gifts as income.

However, donors may not automatically consider their contributions as tax-deductible. Only contributions to qualified 501(c)(3) organizations are tax deductible.

If you want to set up an organization that qualifies as a 501(c)(3) you need to do several things.

The only way to be able to accept tax-deductible contributions is to qualify as a 501(c)(3) non-profit entity with both the IRS and your state.

You will need to complete IRS Form 1023 (http://www.irs.gov/pub/irs-pdf/f1023.pdf) and any required schedules. The instructions for this form are at http://www.irs.gov/pub/irs-pdf/i1023.pdf. If your expected revenues may exceed $5,000, there will be a $500 fee that needs to accompany the application.

Preferably, you should organize as a corporation with an exempt purpose. You should engage an attorney who can draft your Articles of Incorporation and By-Laws with the appropriate language. There may be a fee for incorporation as well as legal fees.

You will definitely need to register your organization with the MN Attorney General's office as a non-profit. See http://www.ag.state.mn.us/charities/charforms.html. Once you are a 501(c)(3) for Federal tax purposes, you do not need to file a MN information return unless you have unrelated business yaxable income (i.e. your operating a business outside of your tax-exempt purpose).

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.
Customer: replied 10 years ago.
Reply to Christopher Phelps's Post: This benefit is a one time event that might raise 5 to 10k. Incorporating seems a bit overkill. I know many people do things like this for people in this situation. Is this the only way for my sister to avoid the taxes? If we do not incorporate or qualify for said above 501(c)(3) the giving parties can still deduct the contributions, the only problem is my sister would have to claim it as income...right?
Expert:  Christopher Phelps replied 10 years ago.
Let me reiterate. The money you collect for your sister and her son will NOT be taxable to them. The money so donated will be considered as a non-taxable gift, the same if you gave them money.

The problem you have is that unless you set up a qualified 501(c)(3), the individuals contributions will not be tax deductible. You do not necessairily have to incorporate to file for 501(c)(3) status. I only suggested that thining you were going to be raising funds over a period of a couple of years. If you do intend to file for non-profit status you will need to have organizing documents that meet certain criteria so I recommend you still engage an attorney to help you with this.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.
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