Charitable contributions are deductible as itemized deductions. Thus, a taxpayer’s total itemized deductions must be greater than the standard deduction to generate tax savings from a gift to charity. The amount of charitable contributions an individual can deduct in any one tax year is limited depending on the types of organizations to which the contributions were made, the kinds of property contributed, and the amount or value of the donated property. Generally, five percentages-of-AGI (adjusted gross income) limitations can apply: two 50% limitations, two 30% limitations, and the 20% limitation (Sec. 170(b)).
The 50% Limitations
The first 50% limitation provides that aggregate deductible contributions (including those subject to the separate 20% or 30% limitations) cannot exceed 50% of AGI. Excess contributions are carried over to the succeeding five tax years and are used on a first-in, first-out basis (Sec. 170(d)). However, for any tax year, all current-year contributions are deducted first.
The second 50% limitation refers to gifts (other than capital gain property) to certain types of charitable organizations (50% charities) that are considered first in computing the overall 50% limit. (The ordering process of when contributions are considered applies when a taxpayer also has contributions to non-50% charities.) The most common 50% charities include churches, schools, hospitals, governmental entities, private operating foundations, and other nonprofit agencies organized for charitable, religious, educational, scientific, or literary purposes (Sec. 170(b)(1)(A)). The IRS Exempt Organizations Select Check tool categorizes qualified organizations as 50% or non-50% organizations. (The information contained in the former Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code, has been incorporated into the tool.)
The 30% Limitations
Two 30% limitations can apply. The first limitation (the regular 30% limitation) applies to gifts of property (including cash) other than capital gain property to charities that do not qualify as 50% charities. Common charities in this group include veterans organizations, domestic fraternal societies, nonprofit cemeteries, and certain private foundations (Sec. 170(b)(1)(B)). It also applies to gifts for the use of any charitable organization (e.g., income interest in trust property or amounts spent for a student living in the home) (Regs. Secs. 1.170A-8(a) and (b)). The second 30% limitation (the special 30% limitation) applies to gifts of capital gain property to a 50% charity (Sec. 170(b)(1)(C)). For these purposes, the term “capital gain property” refers to capital assets (including Sec. 1231 trade or business assets), the sale of which would result in long-term capital gain (Sec. 170(b)(1)(C)(iv)).
Normally, a contribution of capital gain property is measured by its fair market value (FMV) on the date of the gift. However, taxpayers willing to limit their deduction to the tax basis of the property can elect to use the 50% limitation rather than the special 30% limitation for capital gain property contributed to a 50% charity (Sec. 170(b)(1)(C)(iii)). The election, once made, is irrevocable ( Woodbury , 900 F.2d 1457 (10th Cir. 1990)). It applies to all gifts that would otherwise fall under the special 30% limitation for that year, including carryovers subject to the special 30% limitation.
Planning tip: If the special 30% limitation affects the taxpayer’s deduction but the capital gain property contributed has only a small amount of unrealized gain, the taxpayer would probably benefit from electing to deduct basis instead of FMV. This might allow the taxpayer to deduct the full basis in the year contributed rather than taking a slightly larger deduction in a subsequent tax year.
Gifts of capital gain property generally are limited to either 30% or 20% of AGI, depending on the donee. The only way to apply the 50% limitation to a gift of capital gain property is to elect to take a reduced charitable contribution (i.e., deduct the property’s tax basis instead of its FMV). This generally would be detrimental unless the taxpayer is reasonably certain that he or she will be unable to deduct the full amount (i.e., the property’s FMV) during the carryforward period using the 30% limitation. Then, making the election would accelerate the taxpayer’s deduction. This election may also be beneficial if the property’s FMV is not significantly greater than its tax basis and the tax basis exceeds 30% of AGI. Here, the value of accelerating the deduction into the year of the gift (the additional deduction available under the 50% limitation) may offset the permanently forgone deduction.
The 20% Limitation
The 20% limitation applies to gifts of capital gain property to non-50% charities (e.g., most family-funded private foundations) (Sec. 170(b)(1)(D)). This 20% limit is applied after considering the 50% and 30% limits (if any) for the tax year.
Applying the Limitations
The different AGI limitations are applied in the following order:
First, the 50% limitation: Contributions of cash and noncapital gain property (i.e., generally ordinary income property, capital gain property other than long-term gain property, and long-term capital gain property for which an election to use basis has been made) to 50% charities, not to exceed 50% of AGI.
Second, the 30% limitation: Contributions of noncapital gain property (including cash) to non-50% charities and any contributions (other than capital gain property to 50% charities) “for the use of” any charity, to the extent of the lesser of (1) 30% of AGI or (2) 50% of AGI reduced by all contributions to 50% charities (i.e., reduced by regular 50% contributions plus the full value of any capital gain property donated to 50% charities).
Third, the special 30% limitation: Contributions of capital gain property to 50% charities, up to the lesser of (1) 30% of AGI or (2) 50% of AGI less other contributions to 50% charities.
Last, the 20% limitation: Contributions of capital gain property to non-50% charities, to the extent of the lesser of (1) 20% of AGI; (2) 30% of AGI less contributions subject to the 30% limit; (3) 30% of AGI less contributions of capital gain property to 50% charities; or (4) 50% of AGI less the total of contributions to 50% limit organizations and contributions subject to the 30% limit.
Example: V’s 2012 AGI is $100,000. During 2012, she gave her church (a 50% charity) $4,000 cash and land with an FMV of $60,000 and a basis of $44,000. The land was held for investment for more than 12 months (i.e., it is capital gain property). The donation of the land is subject to the special 30% limitation. She also gave $10,000 of capital gain property to a private foundation that is a non-50% charity. The $10,000 contribution is subject to the 20% limitation.
The cash contribution is considered first since it was made to a 50% charity. The other contributions are considered in the order previously described, not to exceed 50% of AGI in the aggregate. The donation of land is subject to the special 30%-of-AGI limit. It is included at FMV ($60,000) in applying the 30% limitation. Therefore, V can deduct a maximum of $30,000 ($100,000 AGI × 30%). The $10,000 contribution to the private foundation is subject to the 20% limitation, but is nondeductible because of the full use of the special 30% limitation ((30% × $100,000 AGI) − $60,000 contribution of land = 0).
V’s total 2012 deduction is $34,000 ($4,000 + $30,000). The aggregate 50% limitation was not reached. Both carryovers will continue to be subject to the special 30% and 20% limits, respectively.
Observation: The percentage limitations are more likely to apply when property other than cash is donated, since either the 30%- or 20%-of-AGI limitation applies. However, if total contributions for the year to qualified charitable organizations total 20% or less of AGI, the percentage limitations (i.e., 50%, 30%, and 20%) will not apply.
Using Contribution Carryovers
Contributions in excess of the annual percentage-of-AGI limitations generally can be carried forward for five years (Sec. 170(d)). Current-year contributions are deducted first, then carryover contributions subject to the ordering rules and limitations discussed previously. Thus, carryover contributions are subject to the same limits that applied (50%, 30%, special 30%, or 20%) in the year from which they are carried. If the taxpayer does not itemize in a year to which contributions are carried, the carryovers must still be reduced by the amount that would have been deductible (without considering the standard deduction) in the carryover year if deductions had been itemized (Regs. Sec. 1.170A-10(b)(2)).
Planning tip: When an individual has charitable contribution carryovers, it may be advisable to defer making any more contributions until the carryover amounts have been deducted. Otherwise, they may expire without obtaining any tax benefits.
This case study has been adapted from PPC’s Guide to Tax Planning for High Income Individuals, 13th Edition, by Anthony J. DeChellis, Patrick L. Young, James D. Van Grevenhof, and Delia D. Groat, published by Thomson Tax & Accounting, Fort Worth, Texas, 2012 (800-323-8724; ppc.thomson.com).
Albert Ellentuck is of counsel with King & Nordlinger LLP in Arlington, Va.