Tax Warning: GoFundMe donations can cost you a big tax bill

Couple faced huge tax bill after getting donations
Posted at 8:40 PM, Feb 27, 2017
and last updated 2017-02-27 21:41:14-05

Crowdfunding, or crowd sourcing, has exploded in popularity. From campaigns for a boy's medical bills, a man's trip to study abroad, or a woman's expenses to attend an opera academy - all in need of money for their own reasons.  

"I got the call probably the same day they got the letter and they were quite panicked, quite concerned," said Chuck O'Donnell.

Local CPA Chuck O'Donnell says while crowd sourcing is an easy way to raise money, you could be setting yourself up for some unexpected tax implications.

"I had a tax client who the community raised money because one of the spouses had a serious heart attack and they raised money to help pay for their medical bills," said O'Donnell.

The couple raised $50,000 through GoFundMe but at the end of the year the IRS wanted their cut.

"In this situation they got a letter that they owed $30,000 worth of taxes on the money received," said O'Donnell.

While GoFundMe states on their website that most donations are considered personal gifts and are not subject to income tax, it warns every situation is different and to consult a tax expert.

"The whole trigger would be the 1099 that GoFundMe sends you, now the 1099 is out there, the IRS gets the 1099 and they're looking for that income somewhere on your return," said O'Donnell.

Even if you're paying for yours, or your dog's medical bills, or any other popular cause, you could end up owing Uncle Sam, depending on how much you raised. Larger amounts tend to catch the IRS' attention. One exception is certified non-profits. 

In the case of O'Donnell's clients, they had all their receipts proving the donations went to medical bills. A letter from O'Donnell with that information erased what was owed. But O'Donnell says don't let yourself get caught off guard by keeping your CPA in the loop.

"This way if you know in July or August, you can prepare for the second half of the year, set some money aside for some estimated taxes and hopefully the penalties and interest," said O'Donnell.

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