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Taxes and helping a friend in need

Chris Farrell Dec 15, 2010

Question: Is money raised to assist a friend with medical bills considered income, thus making her responsible for paying tax on it? (We want to be transparent with donors, and prepare her for the amount she should save for tax time.) I tried very hard to find this on the web/IRS site and it was not obvious (to me, anyway). [This is an urgent question – would very much appreciate an email even if you decide not to air the question. Thanks in advance. Linn, Detroit, MI

Answer: You’re a good friend.

Now,there are always complications, twists and turns when it comes to taxes. My main recommendation is to consult with a tax professional before doing anything. And the more money we’re talking about the more important it’s to get professional guidance.

That said, here’s a thought on a simple, quick way to raise some money from family and friends if that is enough. If they’re willing, they can give her the money she needs out-of-pocket. They don’t get a charitable tax deduction.

They also “gift” the money to her. You’re allowed to give away money or property as a gift each year and, so long as the sum is below the annual gift tax limits, she won’t owe any income tax on the money either..

For the tax year 2010, a single filer can gift up to $13,000.00 to each individual they gift without tax consequences. For a married joint filer the annual gift tax exclusion is up to $26,000. It’s a straightforward way for her family or immediate circle to deal with her medical bills. It works well if we aren’t dealing with huge, ongoing bills but rather a momentary setback.

Now, for my caution (you knew that was coming, didn’t you?). In cases like this, it’s important to research other avenues first, such as what will the hospital do for her, is there a nonprofit agency or foundation that will help out with the bills, and is there government money available to her? I’d exhaust those resources first. It’s often th most efficient way to pay for the medical bills.

What’s more, the more complicated and expensive her situation is the more it makes sense to reach out to a broader community. In that case, I would contact a community foundation in your area and see if it’s possible (and makes financial sense) to partner with the charitable organization to raise money. The donations would then be tax deductible.

I’d really like to know if any listeners and readers have dealt with a similar situation? How did you handle it? And what was your experience? Thanks.

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