By James B. Kruzan
There are many benefits to donating to a worthy cause. Besides getting a warm fuzzy, the tax deduction associated with the gift can be quite beneficial.
This article will cover the rules regarding income tax deductions for gifts to charity, concentrating on outright gifts by individuals to charity.
We will not cover corporate donations, gifts of non-capital gain property, partial interests and gifts of property for the charity’s use. Charitable contributions are subject to two limitations.
The first limit depends on the type of charity and the second depends on the type of item donated.
Charities are broken down into two types, 50 percent charities and 30 percent charities.
The percentage refers to the maximum percentage of adjusted gross income (AGI) that may be claimed in any one year. In order to claim an income tax deduction the charity, whether 50 percent or 30 percent, must be a United States charity. Fifty percent charities include churches, schools, hospitals, endowment funds for public universities, state and local governments, private operating foundations, private grant-making foundations and community chests.
Thirty percent charities include veterans organizations, private non-operating foundations, fraternal organizations and public cemeteries.
If you’re unsure whether an organization is a qualified charity or whether it is a 50 percent or 30 percent charity, consult IRS Publication 78 which provides a listing of all recognized charities.
Gifts of capital gain property are subject to further limitations. To qualify as a donation of capital gain property the item must qualify for capital gains treatment (e.g. property held for investment) and must have been held for more than one year.
Gifts of capital gain property to 50 percent charities are limited to 30 percent of AGI. Gifts of capital gain property to 30 percent charities are limited to 20 percent of AGI. Donations of capital gains property are valued at the fair market value at the time of the donation for all types of charities other than private foundations (under which tax treatment has varied). The taxpayer may elect to limit the value of his donation to his/her cost in exchange for a waiver of the 30 percent or 20 percent limitations.
The limitations are applied in the following order. First, all gifts to 50 percent charities, regardless of the type of property, are totaled. If they do not exceed 50 percent of AGI, gifts to 30 percent charities may be considered but they are limited both by the 30 percent limit and the 50 percent over-all limit. Then the capital gains limits are applied to 50 percent donations. Finally the capital gains limits are applied to 30 percent gifts. Unused deductions retain their character and may be carried forward for five years.
For example, John has AGI of $100,000 and made the following donations; $10,000 in cash and $40,000 in stock (basis $10,000) to his church and $5,000 to a public cemetery. His deduction equals $40,000 and consists of the $10,000 cash donation and $30,000 in stock. John has a carry over of $10,000 for the stock and $5,000 for the 30 percent charity. Take the same facts, except that his basis is $30,000. With the waiver election, his deduction is $45,000 consisting of the $10,000 cash, $30,000 basis (total of $40,000 to 50 percent organizations) and $5,000 to the public cemetery with no carry over.
Tax law bars a deduction for any contribution of $250 or more unless the taxpayer has written substantiation from the charity (canceled checks do not count) receiving the contribution, including a good-faith estimate of the value of any goods or services that have been provided to the donor in exchange for the gift. Substantiation isn’t required if the donee files information with the IRS sufficient to substantiate the deduction amount.
Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate.
James B. Kruzan, CFP, is Registered Principal and Branch Manager for Raymond James Financial Services, Inc. , Clarkston.