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Crowdfunding to Help a Sick Friend Can Lead to a Big Tax Bill for You

02/04/2015 03:28 pm ET | Updated Apr 06, 2015
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Recently Kate wrote to me and asked me a question about the 1099-K form she received after volunteering to raise money to help a sick friend. She was shocked by the big taxable income statement she received. Rightfully so.

This issue of raising funds via online sites like Kickstarter, GoFundMe, and others seems to create issues for successful fund raisers. Issues that the good samaritans are not aware of when just trying to do a good thing. Luckily I think I found a reasonable answer for her 1099-K crowdfunding dilemma.

Kate said, "My friend's mother was diagnosed with cancer and died within a few short months. As the end was nearing I started a GoFundMe page for my friend (age 24) who was to become the sole guardian of her TRIPLET siblings. Due to an amazing community effort, $36,000 was raised. All said it was a miracle...except when the 1099k came in my name and I was told to CLAIM the $36,000 as INCOME. I cannot do this!

I did not get one cent of this money and my student loans are income based, so if the family even (very kindly) paid the taxes on the money, my student loan payments would increase by $500 a month, something I just can't afford.

We are trying to transfer the account to her name but I am at a loss as what to do. I feel that she shouldn't have to pay taxes on this either, especially when fees were taken out and they netted $33,000, not $36,000. What do we do?"

Taxable Income! Yikes!

Kate was rightfully rattled when she received the IRS form and it caught her completely off-guard.

After spending some time looking in Kate's issue what I found was a lack of guidance by the IRS on how to deal with this issue and a lot of information that might scare the average person into thinking they would owe a huge tax bill.

And that fear is not completely unfounded or irrational in lieu of any official IRS guidance on crowdfunding contributions to help someone in trouble.

The core of the issue is the requirement by the underlying payment processors for the crowdfunding services to have to report activity that totals more than $20,000 and has at least 200 transactions. So in reality this is not a problem created by the crowdsource platform itself but by the collection of funds.

But when the IRS reported 1099-K form arrives showing massive taxable income to the person who organized the crowdfunding campaign on GoFundMe, Kickstarter, or some other platform, you can imagine the panic and fear they feel.

The payment processor for the crowdfunding site GoFundMe is a company called WePay. The WePay website says, "It is up to you (and a tax professional) to determine whether your proceeds represent taxable income. WePay will not report the funds that you collected as earned income."

Jim Buttonnow, a CPA with H&R Block told me, "Crowdfunding is a very interesting topic- the critical issue is whether the money received is or is not considered income. It is becoming an issue because taxpayers are receiving Forms 1099-K for merchant card and third party network payments - if they do not report the income the IRS will question the return."

In the case of Kate, if she had to report the $36,000 raised as earned income it could negatively impact her ability to get need based student loans. That's a tragic knock-on effect from this well intentioned act.

The good news for Kate is that I think I found a reasonable solution that she and others could use to minimize or eliminate their tax liability.

Until the IRS provides clear guidance on the tax liability for being a good samaritan and raising funds for someone in need using crowdfunding, the best thing for someone to do is not put the crowdfunding account in their name and instead register it in the name and tax identification number of the person receiving the funds.

Alternatively, you can try to say the funds raised fall under a gift exemption or try to subtract out the donations on your tax return like this. That's a tactic you'd have to see if the IRS would accept and you should absolutely discuss this with your qualified tax preparer.

Following my response to Kate, she has reported back she was able to get WePay to have the account transferred to her friend and said, "The 1099-K was transferred to her as well. I was given written proof that it will not affect my taxes."

Emails to WePay to confirm if this is their official policy for all people stuck in the same spot have gone unanswered.

Before I go I wanted to leave you with three easy action items you jump on right now to address your situation. Just click here.

Do you have a credit or debt related question you'd like to ask me? Just click here. I'm happy to help for free.

Steve

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