Charitable donation refund, charity dissolved; what to do. UPDATE from TAX ACT
Hi Terry,
In 2024 I gave the Morton College Scholarship Foundation $5,000.00 to use for a scholarship in my dead sister’s name. In early 2025, I have them another $5,000.00 for the same purpose. Now, 18 months later, I find they never gave out the money. I asked them to return the money, which they did, and they told me the Foundation was dissolving (This was confirmed to me by Joe Topinka, a board member).
Here is my question: Do I file amended returns for the deduction I took in 2024 and 2024, or do I report the $10,000.00 they have just returned (so 2026) and pay tax on that money?
I don’t know if I need an CPA, or a Tax Attorney to solve this.
Thank you so much for all you do for consumers!
Sincerely,
J. J
PS…some funny stuff going on with the charity, they never filed State tax returns since 2022, and other donors has similar experiences with the manager, which prompted my request for a refund.
Terry Says
Whew, I really don’t know the answer to this question. I don’t think you would file amended returns, but you might have to take the returned money as income on this year’s return. But that’s just a guess. Let me contact my experts at TaxAct and see if they have a correct answer.
When I answered your question last week I promised an update. The experts at TaxAct gave me this info: ***********************
The main issue is whether the taxpayer got a tax benefit from the contribution – in other words, did itemizing occur?
If taxpayer did not receive a full tax benefit from the deduction (for example, if they were subject to the charitable contribution AGI limits or did not itemize), they only need to include in income the portion that actually reduced their tax. If this applies, they may need to calculate the tax benefit received for each year.
Do You Amend Prior Returns or Report as Income in 2026 if tax benefit received?
• No Amended Return Required: They do not amend their 2024 and 2025 returns to remove the deduction. Instead, they report the $10,000 as income in 2026, the year they received the refund.
• How to Report: The $10,000 is reported as “Other Income” on their 2026 Form 1040, Schedule 1, line 8z, with a description such as “Charitable contribution recovery”.
And below is the details they added to the simplified answer above!! Sincere thanks to TaxACT for all this work. It still boggles my mind!
Here is the full answer.
To address your situation, we need to determine the correct tax treatment of the $10,000 you donated to the Morton College Scholarship Foundation in 2024 and 2025, which was later returned to you in 2026 after the Foundation failed to use the funds as intended and dissolved.
1. Initial Deduction of Charitable Contributions
• Deductibility: Charitable contributions are deductible in the year they are made, provided they are made to a qualified organization and you itemize deductions on Schedule A.
• Qualified Organization: The Morton College Scholarship Foundation appears to be a qualified organization, so your original deductions for 2024 and 2025 were proper, assuming you received no benefit in return and the funds were not earmarked for a specific individual (your sister’s name on the scholarship does not, by itself, disqualify the deduction if the Foundation had full control over the funds and the selection process).
2. Return of the Contribution
• Return of Funds: In 2026, you received the $10,000 back because the Foundation did not use the funds and dissolved.
• Tax Treatment: The Internal Revenue Code addresses this situation under the “tax benefit rule” (IRC). If you previously claimed a deduction for an amount that is later returned to you, you must include the returned amount in your gross income in the year you receive it, but only to the extent that the original deduction reduced your tax in the earlier year.
• IRC: “Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.”
• Practical effect: If you received a tax benefit from the deduction (i.e., it reduced your tax liability), you must include the recovered amount in your income in the year you receive it (2026). If you did not receive a tax benefit (for example, if you were subject to the alternative minimum tax or your deductions were limited), you only include the portion that actually reduced your tax.
3. Do You Amend Prior Returns or Report as Income in 2026?
• No Amended Return Required: You do not amend your 2024 and 2025 returns to remove the deduction. Instead, you report the $10,000 as income in 2026, the year you received the refund.
• How to Report: The $10,000 is reported as “Other Income” on your 2026 Form 1040, Schedule 1, line 8z, with a description such as “Charitable contribution recovery”.
4. References and IRS Guidance
• IRS Publication 526: If a charitable contribution is returned to you, you must include the amount in your income in the year you receive it, to the extent you previously deducted it and received a tax benefit.
• IRS Publication 17: Also confirms that if you recover an amount you previously deducted, you must include it in your income in the year you receive it if the deduction gave you a tax benefit.
5. Summary Table
Year Action Tax Treatment
2024 $5,000 donation Deduct on Schedule A (if itemizing)
2025 $5,000 donation Deduct on Schedule A (if itemizing)
2026 $10,000 returned Report as income on Schedule 1, line 8z
6. Special Notes
• If you did not receive a full tax benefit from the deduction (for example, if you were subject to the charitable contribution AGI limits or did not itemize), you only need to include in income the portion that actually reduced your tax. If this applies, you may need to calculate the tax benefit received for each year.
In summary:
You do not file amended returns for 2024 and 2025. Instead, you report the $10,000 as income in 2026, the year you received the refund, to the extent you received a tax benefit from the original deductions.
