Income limitations on charitable deductions

Income Limits on Charitable Deductions

Russell James, J.D., Ph.D., CFP®

Professor, Texas Tech University

Income Limits on Charitable DeductionsPart I: Introduction

If you want to ask

BIGyou need to ask for

gifts of assets.

If you ask for gifts of assets, you need

to know these rules

We pay taxes on income

Charitable gifts can sometimes be deducted from taxable income, thereby reducing taxes owed

Charitable deductions are limited to 20%, 30%, or 50% of income

depending on the gift and recipient

Why should we limit charitable deductions?

Encouraging giving is good,

but at least some revenue should go to

the government

Otherwise, wealthy

people could pay zero taxes by annually

transferring assets to charity

Taxes? Oh, no, we don’t pay taxes.

Why are people making such large donations, anyway?

Are people taking vows of poverty and giving away everything they earn?

Actually, thelimits are an issue with gifts from assets where wealth is far greater than annual income

A common issue with wealthyretiree donors who have limited taxable income but large assets

Income Limits on Charitable DeductionsPart I: Introduction

Income Limits on Charitable DeductionsPart II: Gifts to public charities

Some gifts may be deducted up to 50% of income if given to a public charity, government, or an operatingprivate foundation

Note: The term “income” in these slides means adjusted gross income for the year of the gift excluding any

net operating loss carryback

Public CharityAnything EXCEPT long-

term capital gainor a farmer giving a

qualified conservation easement

50% limit

Money(given or spent

performing services for the charity)

Public Charity

50% limitAny ordinary

income property

Public Charity

Ex: Creations by the donor

Public Charity

income property

Public Charity

Any ordinary income property

50% limit

Short-Term Capital Gain Property

(held 1 year or less)

Cash and ordinary income property are treated the same because they aren’t long-term capital gain property

1990 Paid: $1

Current Value: $25

Long-term (>1 year) capital gain property

If fair market value of gain property can be

deducted, then gifting to a public charity is

30% limit

If only basis of gain property can be

deducted, then gifting to a public charity is

50% limit

1990 Paid: $600 acre

Current Value: $2,800/acreLong-term capital gain property deducted at fair market value and given to public charity

30% limit

1990 Paid: $600 acre

Current Value: $2,800/acre

“Special election” values all long-term capital gain gifts in a year at basis, then such gifts to public charity

50% limit

A similar idea applies to long-term capital gain tangible personal property

(All the stuff in your garage, including cars, jewelry, artwork)

Public Charity1990 Paid $1

Current Value: $25

50% limit long-term capital gain tangible personal property

valued at BASIS due to “unrelated use”

Public Charity1990 Paid $1

Current Value: $25

30% limit long-term capital gain tangible personal property

valued at FAIR MARKET VALUE due to “related use”

Income Limits on Charitable DeductionsPart II: Gifts to public charities

Part III: Gifts to private foundations

30% limit Not “to” but “for the use of” charity

Money given “in trust” to another entity where charity gets current benefit such as a Charitable Lead Trust or paying

premiums for charity-owned life insurance

CLT or Insurance Company

Current Benefit

20% limit long-term capital gain “for the use of” charity

So, that covers gifts to public charities.

What’s about gifts to private foundations?

Anything EXCEPT long-term capital gain

30% limit

Bill & Melinda Gates Private Foundation

Private Foundation (non-operating)

30% limit

Money(given or spent

performing services for the charity)

income property

Ex: Creations by the donor

income property

Any ordinary income property

30% limit

Short-Term Capital Gain Property

(held 1 year or less)

20% limit

1990 Paid $1

Current Value: $25

Long-Term Capital Gain Property

20% limit

Long-Term Capital Gain Property (including tangible personal property)

Current Value: $25

1990 Paid $1

C-corp: limited to 10% of taxable income with 5-year carry forward.

S-corp: passes through all deductions to shareholders.

Corporate Giving

Current Value: $25

1990 Paid $1

Long-term capital gain property valued at basis

“unrelated” use tangible personal property

Public Charity

Anything except long-term capital gain property (e.g., cash or ordinary income property)

special election

Current Value: $25

1990 Paid $1

“related use” tangible personal property

Public Charity

no special election

Long-term capital gain property valued at fair market value

Anything except long-term capital gain property (e.g., cash or ordinary income property)

Any long-term capital gain property

Current Value: $25

1990 Paid $1 Private Foundation (non-operating)

Part III: Gifts to private foundations

Part IV: Carryover deductions

What happens if you give more than the limit?

The excess deduction may

be used later (as soon as

charitable deductions do not exceed the income limits),

but must be used within five years.

Unused charitable deductions may be carried over for up to 5 years

Year 1

Charitable Deduction Maximum for Each Year

Deductible in Year 1 (under limit)

Not Deductible

in Year 1 (over limit)

Deductible Carryover

Deductible Gifts Made

in Year 2

in Year 3

in Year 4

Year 4Year 2 Year 3

Not Deductible

Oldest carryover deductions are used first

Not Deductible

in Year 3

in Year 4

in Year 5

Year 1 Year 4Year 2 Year 3 Year 5

What happens to a carryover deduction if I don’t itemize (i.e., just take the standard deduction)?

Not Deductible

Carryover Eliminated

Potentially Deductible Gifts Made

in Year 2

in Year 3

in Year 4

The carryover is reduced as if you took the maximum possible charitable deduction

In year 2 no gifts were deducted

because the standard deduction

was used

Year 1 Year 4Year 2 Year 3

What happens to a carryover deduction if the donor dies?

The carryover deduction is

lost at death.

For joint returns, the carryover that could have been claimed by the decedent if the couple had

filed separately is lost.

Part IV: Carryover deductions

Part V: Complex combinations

How do the different limits work together?

Income

20%of Income

30%of Income

Each limitation rule is like a glass that can only hold so much. For each glass, you

must find out if the total gifts for the year of that type will fit.

All gifts All gifts of LT capital gain

(except “special election”)

All gifts to private

foundations or “for the use of” public charities

All gifts of LT capital gain to private

foundations

Income

20%of Income

30%of Income

Any overflow in any category is carried over. Some gifts may be carried over for

more than one reason (i.e., they may spill out of more than one glass).

foundations

Income

20%of Income

30%of Income

$30,000 FMV LT capital gain property to public charity

$20,000 cash to private foundation

$100,000 income

foundations

Income

20%of Income

30%of Income

$100,000 income

$50,000

$30,000

$20,000$0

$20,000 cash to private foundation

foundations

Income

20%of Income

30%of Income

$50,000

$30,000

$20,000$0

No carryover. All deductions are allowed in the current year.

$100,000 income

foundations

If not all gifts can be deducted (i.e., there is carry over) which gifts

get deducted first?

Current Value: $25

1990 Paid: $1

Current Value: $25

1990 Paid: $1

Cash or ordinary income property

LT capital or tangible personal propertyvalued at basis

Cash or ordinary income property

LT capital or tangible personal property

valued at FMV

LT capital or tangible personal property

Income

20%of Income

30%of Income

$30,000 cash to public charity$30,000 FMV LT capital gain

property to public charity

$100,000 income

foundations

Income

20%of Income

30%of Income

$100,000 income

X $60,000

$30,000

foundations

Income

20%of Income

30%of Income

$100,000 income

$30,000

$20k FMV capital gain

property$30k cash

propertyX

foundations

Income

20%of Income

30%of Income

$30,000

$10,000 carryover of FMV capital gain charitable deduction

property

propertyX

foundations

$30k cash

Income

20%of Income

30%of Income

property to public charity$5,000 cash to private foundation

$100,000 income

foundations

Income

20%of Income

30%of Income

$100,000 income

X $63,000

$56,000

$5,000

30%of Income

foundations

Income

20%of Income

30%of Income

$100,000 income

$5,000

30%of Income

property$2k cash to

public charity

propertyX

$5k cash to private f.X

property

propertyX

foundations

Income

20%of Income

30%of Income

$5,000

30%of Income

property$2k cash to

public charity

propertyX

$5k cash to private f.X

property

propertyX

$5,000 carryover of cash to private foundations

$26,000 carryover of FMV LT capital gain property (includes the $8,000 already carried over for other reasons)

foundations

$5,000 cash to private foundation: Deduct $0$2,000 cash to public charity: Deduct $2,000

$56,000 FMV LT capital gain property to public charity: Deduct $30,000

+ $5,000 carryover of cash to private foundations charitable deduction

+ $26,000 carryover of FMV LT capital gain property charitable deduction

Income

20%of Income

30%of Income

$20,000 LT capital gain property to private foundation

$100,000 income

foundations

Income

20%of Income

30%of Income

$100,000 income

$40,000

$20,000$20,000

30%of Income

foundations

$40,000

Income

20%of Income

30%of Income

$100,000 income

$20,000

30%of Income

$40,000

$20k FMV capital gain to public charity

$10k capital gain to priv. f.

$10k capital gain to priv. f.X

foundations

Income

20%of Income

30%of Income

$20,000

30%of Income

$20k FMV capital gain to public charity

$10k capital gain to priv. f.

$10k capital gain to priv. f.X

$10,000 carryover of capital gain property given to a private foundation

foundations

$40,000

Part V: Complex combinations

Help me

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All slides are taken from the

book Visual Planned Giving.

Available from Amazon.com

Russell James, J.D., Ph.D., CFP®

Professor, Texas Tech University

Income limitations on charitable deductions

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