Getting the most out of individual charitable contributions.
by Richard Boes and Gary Wells/The Tax Adviser
Determining the charitable contribution deduction can be surprisingly complex for some taxpayers. This is especially true when taxpayers donate to relatively unknown organizations, or donate property and/or bump into the various percentage limits that may apply to their contributions.
Thanks to recent tax legislation, even seemingly innocent contributions of clothing, household appliances, cars and even taxidermy property have become more complex.
Below, we’ll look at three issues that you must resolve to determine the amount your clients are allowed to deduct on their tax returns: (1) Is the entity a qualifying charity? (2) How much was donated? (3) How much is currently deductible? The article focuses only on individuals.
Is the Entity a Qualified Charity?
The first question a taxpayer must answer in claiming a charitable deduction is whether the organization is a qualifying charity. Sec. 170(c) basically lists generic qualifying organizations. Many organizations, such as the American Red Cross and the American Cancer Society, are widely recognized as bona fide charities falling within these general listings. But suppose your client has made a contribution to the Green Guerillas, the Blue Jeans Center, Inc. or the Fabulous Leopard Percussionists Inc.? Are these organizations bona fide charities? Practitioners and taxpayers can consult IRS Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986, to see if a relatively unknown specific organization is listed as a qualifying charity.
This publication also indicates whether the charity is a public charity (50% limit) or a private charity (30% limit). For instance, each of the above organizations is identified as “a public charity with a 50 percent deductibility limitation.” The Bill and Melinda Gates Foundation is identified as “a private foundation, generally with a 30 percent deductibility limitation.” Although this publication is useful, practitioners and taxpayers need to be aware that it does not list all qualifying organizations.
How Much Is Currently Deductible?
Various percentage limits apply to determine how much of the charitable contributions are currently deductible. The appropriate limits depend on the nature of the charity and the type of property donated. Properties must also be “sequenced” in order to determine the amounts currently allowed. Initially, general limits for public and private charities are determined; sub-limits are then calculated for capital gain property.
Contributions to public charities (50% limit organizations) are taken first. The allowable deduction for amounts donated to these organizations is limited to 50 percent of the taxpayer’s contribution base for the tax year. The contribution base is adjusted gross income (AGI) computed without regard to any net operating loss carryback to the tax year. Contributions subject to the 30 percent sub-limit on capital gain property are taken after contributions that are not subject to the sub-limit.
Contributions to private charities (30% limit organizations) are then addressed. For amounts donated to these organizations, the deduction is limited to the lesser of (1) 30 percent of AGI or (2) the excess of 50 percent of the taxpayer’s AGI over the allowable amounts to the public charities.
The third item in sequencing involves capital gain property that is donated to public charities where no reduction for the inherent capital gain in the property was required. A sub-limit of 30 percent of AGI is imposed on this property. Thus, amounts previously allowed under the general 50 percent-of-AGI rule for public charities may be reduced by this new sub-limit.
The final step is to use the sub-limit that applies to capital gain property donated to private charities. This sub-limit is equal to the lesser of (1) 20 percent of AGI or (2) the excess of 30 percent of AGI over the amount of capital gain allowed in the third step above. Property subject to this sub-limit is taken after all other donations to 30 percent charities.
Any contributions exceeding these limits may be carried forward by the taxpayer and claimed in the succeeding five years. Contribution carry-forwards remain subject to the same percentage limitations they had in the year of origination. Contributions made in any of the succeeding years are taken before any carry-forward contributions. Allowable carry-forward contributions are claimed in the order made.
Taxpayers must examine three things to determine their charitable contribution deduction for any particular year:
Fortunately, most taxpayers do not face all the complexities that may surround the charitable donation deduction. However, all taxpayers should be aware of recent law changes denying deductions for contributions where the taxpayer lacks substantiating bank records or written communication from the charities. In addition, taxpayers should be aware that household goods must now be in “good used condition” in order to get a deduction and the IRS may by regulation deny a deduction for clothing and household items that have minimal monetary value.
When taxpayers donate property to charities, determining the allowable deduction becomes more complex. The amount donated will depend on a number of factors, such as the type of property donated, the holding period of the property and what the charity intends to do with the donation.
For taxpayers hitting the percentage limitations, the computation becomes even more complex. Donations denied in the current year may be carried forward for only five years, so taxpayers should plan ahead to make sure that the carry-forward amounts do not expire.
As the large amounts of money and property contributed to charitable organizations each year show, Americans continue to be a most generous people. It is unfortunate that they sometimes must face the complex computations to take advantage of a reward for their generosity.
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Richard F. Boes, Ph.D., is Professor of Accounting at Idaho State University in Pocatello, Idaho. Gary R. Wells, Ph.D., is Professor of Finance also at Idaho State University, Pocatello, Idaho. Both Boes and Wells are contributing writers for The Tax Adviser. Their views as expressed in this article do not necessarily reflect the views of the AICPA, The Tax Adviser or the AICPA CPA Insider™.
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