Charitable Contributions

Posted on July 22, 2008 
Filed Under Deductions, Federal Income Tax

The category of charitable contributions is an important exception to the general rule that personal expenses are not deductible. For critics, the charitable contributions deduction is an inefficient tax expenditure for pet projects of the wealthy; but for advocates, the nongovernmental funds the deduction creates are put to more effective use than any federally spent dollar. Of even greater significance is the fact that Congress has granted this exception because it believes charitable organizations relieve the government of significant welfare costs. And given the complexity of Code section 170 (”Charitable, etc., contributions and gifts”), one could argue this legislative grace also provides a windfall for tax lawyers and public accountants.

Charitable contributions are deductible below the line, that is, they are classified as itemized deductions. As a general rule, individuals who itemize can deduct the fair market value of property donated to qualified organizations. There are exceptions to this rule, however. In brief, for individuals who itemize, the ceiling for the charitable contributions deduction is 50%, 30%, or 20% of taxpayer’s adjusted gross income (AGI), depending on the character of asset donated and the type of donee organization. In any event, total charitable contributions for the year cannot exceed 50% of the taxpayer’s AGI and may be subject to the phase out of itemized deductions for high AGI taxpayers; in 2008, the phase out will affect individuals married filing jointly with AGI over $159,950 ($79,975 for married filing separately). Charitable contributions that exceed any of the ceilings can be carried forward for five years.

For the most part, deductible charitable contributions are donations of cash or property to or for the use of a qualified charitable organization. Qualified charitable organizations include U.S. governmental entities and any donee organized primarily for charitable, educational, literary, religious, or scientific purposes. In a part sale, part gift transaction, the bargain element (market price less selling price of property) is deductible as a charitable gift, but the donor must apportion basis between the gift and sale components. Amounts paid for admission to fundraising events are deductible only if the taxpayer can demonstrate that a clearly identifiable portion of the admission price is a charitable gift. However, the cost of bingo, lottery, or raffle tickets is not deductible because the purchaser, by reason of having a chance to win a valuable prize, receives full consideration. (In this article, I focus on the charitable contributions deduction for individuals, but for those interested, a corporation can generally deduct for charitable contributions up to 10% of its taxable income.)

Nondeductible charitable contributions include money or property given to individuals, foreign organizations, civic leagues, chambers of commerce, social and sports clubs, lobbying organizations, homeowners’ associations, political parties, or individuals running for public office. Even if made to a qualified donee, contributions earmarked for particular individuals are not deductible. No deduction is allowed for the value of personal services donated to a charitable organization, but a taxpayer can deduct any out-of-pocket expenses incurred while rendering such services. Also, if a charity is given the right to use property but the transfer is for less than the taxpayer’s entire interest, then no deduction is allowed for rent or other value of this right. Instead, the use is viewed not as a gift but rather as a grant of a privilege to the charity. The same type of restriction applies to donations of stock without surrender of voting rights: the IRS considers this to be an incomplete and therefore nondeductible transfer because the donor retains a substantial interest in the property.

In larger terms, a taxpayer cannot take a charitable deduction if he or she benefits from the transaction; any contribution made with the anticipation of economic benefit rather than from a “detached and disinterested generosity” [Commissioner v. Duberstein, 363 U.S. 285 (1960)] is not deductible. Put differently, a contribution is deductible only if made with donative intent and to the extent it exceeds the market value of any benefit received. The burden of proof is on the taxpayer to establish that a contribution does in fact meet these standards.

Several other basic principles apply to charitable contributions. As mentioned earlier, donations must be “to or for the use of” a qualified charity in order to be deductible; “to” a charity is obvious, but “for the use of” means “in trust for” the charity, or, in the words of Justice O’Connor, “the recipient charity exercises control over the donated funds” [Davis v. United States, 495 U.S. 477 (1990)]. In short, to be deductible, the transfer must be directly to the charity or a trust for the charity. Second, the charity must have a possessory interest in the property; this restriction rules out the deductibility of future interests in tangible personal property, but gifts of a fractional or future interest in the donor’s personal residence or farm are deductible for the value of the interest. Another exception to a strict reading of the possessory interest rule is the deduction for a charitable remainder annuity trust or unitrust. These trusts are qualifying split-interest trusts that have noncharitable beneficiaries; a deduction is also available for a pooled income fund, which is essentially the same as a charitable remainder annuity trust or unitrust, except that it is maintained by a public charity authorized to accumulate remainder interests for several donors. Congress has prescribed strict restrictions on these split-interest trusts to ensure that charities actually receive amounts previously deducted by donors. Third, a gift of an income interest is deductible only if the income remains taxable to the donor; this provides a foundation for the deduction and prevents donors from realizing a double tax benefit. Finally, gifts other than cash over $5,000 ($10,000 for nonpublicly traded securities) must be supported by an appraisal. For more on documents needed to substantiate charitable contributions, click on , (pdf file), and (pdf file).

Qualified public charities (also known as “50% organizations”) include:

  1. Churches, church associations, church conventions, mosques, synagogues, etc.;
  2. Educational organizations maintaining a regular faculty and student body;
  3. Government-supported organizations administering property for qualified educational organizations;
  4. Hospitals and medical research organizations;
  5. Governmental units;
  6. Corporations, trusts, foundations, or community chests formed in the United States and operated exclusively for charitable, educational, literary, religious, or scientific purposes;
  7. Corporations, trusts, foundations, or community chests formed in the United States and organized for the promotion of national or international amateur sports competition or the prevention of cruelty to children or animals;
  8. Private operating foundations, organizations that distribute substantially all of their income for charitable purposes; and
  9. Private nonoperating foundations that distribute all of their income to public charities.

Qualified private charities (also known as “30% organizations”) include:

  1. Private nonoperating foundations not meeting the payout requirements for 50% organizations;
  2. Veterans’ organizations;
  3. Fraternal societies; and
  4. Nonprofit cemeteries.

Click on to see a more comprehensive review of qualified charitable organizations and for a list of charitable organizations eligible to receive deductible contributions of cash or property.

The deductibility of charitable contributions for individuals is subject to the following ceiling amounts:

  1. 50% public limitation category. 50% of the donor’s AGI for (a) contributions of cash and ordinary income property (property that if sold rather than donated would cause the taxpayer to recognize income other than long-term capital gains) or capital gain property held short term to 50% organizations or (b) contributions of capital gain property or unrelated use property (i.e., property unrelated to the donee organization’s primary charitable purpose) to 50% organizations where any amount deducted in (a) or (b) is reduced by the property’s unrealized appreciation or depreciation that would be recaptured as ordinary income on a sale.
  2. 30% public limitation category. 30% of the donor’s AGI for contributions of capital gain property or appreciated, publicly traded stock held long term (but limited to 10% of the value of outstanding stock) to 50% organizations.
  3. 30% private limitation category. 30% of the donor’s AGI for contributions of cash and ordinary income property or capital gain property held short term to 30% organizations provided any amount deducted is adjusted downward for unrealized appreciation or depreciation that would be recaptured as ordinary income on a sale.
  4. 20% private limitation category. 20% of the donor’s AGI for (a) contributions of capital gain property or unrelated use property to 30% organizations where the amount deducted is reduced by the property’s unrealized appreciation or recaptured depreciation producing ordinary income or (b) contributions of appreciated, publicly traded stock held long term (no more than 10% of the value of outstanding stock) to 30% organizations.

In a nutshell, a taxpayer may deduct, up to 30% of his or her AGI, the fair market value of long-term capital gain property donated to public charities; but only basis for donations of ordinary income property, short-term capital gain property, and unrelated use property to public or private charities. Regardless of type of property or charitable donee organization, if the property’s fair market value is below its basis, the deduction is limited to fair market value.

An algorithm to figure the overall charitable contributions deduction is detailed below:

  1. Contributions in the 50% public limitation category are limited to 50% of AGI, hereafter referred to as the 50% AGI maximum.
  2. Contributions in the 30% public limitation category are limited to the 50% AGI maximum minus contributions in the 50% public limitation category.
  3. Contributions in the 30% private limitation category are limited to the 50% AGI maximum minus contributions in the 50% public and 30% public categories.
  4. Contributions in the 20% private limitation category are limited to the 50% AGI maximum minus contributions in the 50% public, 30% public, and 30% private categories.

More information on the charitable contributions deduction can be found in the following resources:

Many happy returns, Roger

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