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Understanding Charitable Contributions: Limits, Types, and Tax Implications

This chapter outlines the IRS rules governing charitable contributions, including limitations tied to a taxpayer's adjusted gross income (AGI). Deductions can be claimed in the year contributions are made to qualified organizations like public charities, schools, and religious institutions, but not for donations to individuals. Different types of property, such as cash, capital gain property, and ordinary income property, affect the deduction limits. Special exceptions for specific contributions, service reimbursements, and corporate donations are also discussed, providing essential guidance for taxpayers and financial planners.

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Understanding Charitable Contributions: Limits, Types, and Tax Implications

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  1. Chapter 7(cont) Charitable Contributions • Limited to 50% of AGI • Deduction taken in year of contribution, regardless of taxpayer’s method of accounting • Must be made to a qualified organization • Contributions to a needy individual is not deductible

  2. Qualifying organization • Public Charity • church, educational institution, hospitals, government unit, private operating foundations, government sponsored organizations to administer university properties and etc. • Private non-operating foundation - does not receive funding from general public

  3. Types of contribution • Cash received • Noncash property • value of property depends on type of property donated and qualifying organization in which the property is donated • Property donated that is smaller than the donor’s entire interest is not considered as charitable contributions

  4. Type of property • Capital Gain property • holding period > 1 year • Amount of donation is its FMV • exception 1 - private nonoperating foundation, FMV is reduced by capital gain that would be recognized if sold • exception 2 - unrelated use property - contributed to public charity but not for the use of charity purpose - FMV is reduced by capital gain (immediate sale is considered as unrelated use)

  5. Ordinary income property • Holding period < 1 year • Property that would result in the recognition of income taxed at ordinary income rates if the property were sold. Includes inventory , works of art and capital held < 1yr • Exception 1 - corporation donating inventory for the ill, needy and infants • Exception 2 - donation of scientific equipment to college/university for research by manufacturer or computer software to elementary/secondary school (subject to limitation) • Exception 1 & 2 - amount = FMV = 0.5*(gain recognized) limited to twice of adjusted basis of property

  6. Services contributed • Only unreimbursed expenses of the following are deductible • Transportation ($0.14 a mile) • Meals (50%) and Lodging • Uniform • Opportunity costs for services contributed is not deductible

  7. Limitation amount • Max - 50% of AGI • Excess is carry forward for the subsequent 5 years • Capital gain property contributed to public charity is limited to 30% of AGI • Ordinary and cash property contributed to private nonoperating foundation is also limited to 30% of AGI • Contributions of capital gain property to private nonoperating foundation are limited to the lesser of 20% of taxpayer’s AGI or 30% of taxpayer’s AGI reduced by capital gain contributed to public charity • Contributions to athletics events in return for the right to purchase tickets (80% limitation) • Apply 50% limitation contributions first and then the 30% limitation • Carryover amounts subject to the same % limitations. Deductions for current year is applied first.

  8. Miscellaneous items • Accrual method corporate taxpayer can deduct a pledge made if the contribution is made on 15th day of 3rd month following the close of the year • Corporate charitable deductions are limited to 10% of taxable income. Tax-planning • May be beneficial to take election to reduce contribution amount to adjusted basis in order to deduct up to 50% of AGI (lose carryforward) • Decision to sell and donate - for property that has decreased in value

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