‘Stacking’ charitable contributions up to the 60% limit

Editor: Mary Van Leuven, J.D., LL.M.

The law known as the One Big Beautiful Bill Act (OBBBA), H.R. 1, P.L. 119–21, made permanent the deduction limitation of 60% of adjusted gross income (AGI) that applies to charitable contributions of cash made by individuals to public charities, which was originally enacted as a temporary provision by the Tax Cuts and Jobs Act (TCJA), P.L. 115–97.

The OBBBA also amended the application of the 60% limit, potentially allowing individuals to deduct up to 60% of AGI even when they make aggregate cash contributions to public charities that are less than 60% of AGI, in conjunction with contributions of noncash property and/or cash to eligible donees other than public charities. The caveat “potentially” must be used because it is not entirely clear that Congress successfully accomplished this goal.

This item reviews the limitations on individual contributions before and after the TCJA and the changes to the limitations made by the OBBBA and how they potentially allow for “stacking” of different kinds of contributions up to the 60% limit. It will then summarize an omission in the OBBBA amendments that raises questions about whether stacking is possible in all situations.

Limitations on individual charitable contributions before the TCJA

For charitable contributions made by individuals, Sec. 170 contains numerous percentage limitations based on AGI that depend on the type of property being contributed and the nature of the donee. Prior to the TCJA, the highest percentage limitation in Sec. 170 (except for certain qualified conservation contributions of farmers and ranchers) was 50% of the individual’s AGI for the tax year — or, more specifically, 50% of the individual’s “contribution base,” defined as AGI without regard to any net operating loss carryback (Secs. 170(b)(1)(A) and (H)). This 50% limit applied to contributions to public charities described in Sec. 170(b)(1)(A), as well as certain private operating, “conduit,” and “common fund” foundations described in Sec. 170(b)(1)(F) (together, “public charities”). If the property being contributed would generate long–term capital gain if sold (LTCG property), the deduction is limited to 30% of AGI (unless the deduction was reduced to basis) (Sec. 170(b)(1)(C)).

With respect to contributions to eligible recipients other than public charities — typically, private nonoperating foundations not described in Sec. 170(b)(1)(F) — the relevant limitation was described as “the lesser of — (i) 30 percent of the taxpayer’s contribution base for the taxable year, or (ii) the excess of 50 percent of the taxpayer’s contribution base for the taxable year over the amount of charitable contributions” made to public charities (Sec. 170(b)(1)(B)). If the property being contributed is LTCG property, the contribution is further limited to no more than 20% of AGI (Sec. 170(b)(1)(D)).

The addition of the 60% limit

The TCJA added a new 60% limit for contributions of cash to public charities (Sec. 170(b)(1)(G)(i)). The TCJA also added a provision that coordinates this new 60% limit with the preexisting limits (the coordinating provision). This coordinating provision states (1) contributions taken into account under the 60% limit are not taken into account under the 50% limit; (2) the 50% limit for the tax year is reduced (but not below zero) by any contributions allowed under the 60% limit; and (3) the reference to contributions subject to the 50% limit in Sec. 170(b)(1)(B) should be read to also include contributions subject to the 60% limit (Sec. 170(b)(1)(G)(iii)).

The TCJA did not amend the limitations appearing elsewhere in Sec. 170 to coordinate them with the new 60% limit. As a result, Sec. 170 did not appear to allow individuals to combine contributions subject to those other limits with the cash contributions eligible for the 60% limit to reach the 60% limit. Rather, taxpayers were typically still limited to 50% of AGI when they attempted to combine different kinds of contributions.

Example 1: An individual taxpayer with no charitable contribution carryovers and AGI of $1.5 million made $450,000 in cash contributions to public charities (eligible for the 60% limit) and $450,000 in cash contributions to a private nonoperating foundation (not described in Sec. 170(b)(1)(F)) in 2025. The full $450,000 in cash contributions to public charities would be allowable, as $450,000 equals only 30% of AGI, well below the 60% limit. Pursuant to Sec. 170(b)(1)(B), the contributions to the private foundation would be limited to the “lesser of — (i) 30 percent of the taxpayer’s contribution base for the taxable year, or (ii) the excess of 50 percent of the taxpayer’s contribution base for the taxable year over the amount of charitable contributions” made to public charities. Accordingly, the taxpayer’s contributions to the private foundation would be limited to the lesser of (i) $450,000 (30% of AGI) or (ii) $750,000 (50% of AGI) minus $450,000 (the contributions made to public charities), or $300,000. Thus, only $300,000 of the $450,000 contributions to the private foundation would be allowable as a deduction. The total deductions for the tax year would be $450,000 + $300,000, or $750,000, which is 50% of AGI, rather than all $900,000 in contributions, equal to 60% of AGI.

The same result would happen with individuals who attempted to combine cash and noncash gifts.

Example 2: The same individual taxpayer as in Example 1 makes $450,000 in cash contributions to public charities (eligible for the 60% limit), but now the other $450,000 in contributions is made to public charities of noncash property other than LTCG property (eligible for the 50% limit). As in the prior example, the full $450,000 in cash contributions to public charities would be allowable, as $450,000 is well below the 60% limit. However, the coordinating provision requires the taxpayer to reduce the 50% limit for the tax year applicable to the noncash gift by the $450,000 allowed under the 60% limit. Accordingly, the 50% limit of $750,000 would be reduced by $450,000 to $300,000, meaning only $300,000 could be deducted for the noncash property. Again, the taxpayer could deduct only a total of $750,000 (50% of AGI) and not all $900,000 contributed (60% of AGI).

The Joint Committee on Taxation (JCT) report indicates this result was not intended, stating that “the 60–percent limit for cash contributions is intended to be applied after (and reduced by) the amount of noncash contributions” to public charities (JCT, General Explanation of Public Law 115–97 (JCS–1–18),page 51 (Dec. 20, 2018)).But Treasury and the IRS released no guidance altering what appeared to be the result under the statute’s plain language.

Enter the OBBBA

The OBBBA attempted to solve the “stacking” problem by amending both Sec. 170(b)(1)(B) and Sec. 170(b)(1)(G). Sec. 170(b)(1)(B) was amended so that the limitation on contributions to most private nonoperating foundations is now the “lesser of — (i) 30 percent of the taxpayer’s contribution base for the taxable year, or (ii) the excess of 50 percent of the taxpayer’s contribution base for the taxable year over” the amount of charitable contributions to public charities “reduced by (II) so much of the contributions taken into account under [the 60% limit] as does not exceed 10 percent of the taxpayer’s contribution base” (emphasis added).

The addition of the 10% reduction effectively allows a taxpayer to combine cash contributions to public charities with contributions to private nonoperating foundations to reach the 60% limit. If the individual in Example 1 made $450,000 in cash contributions to public charities and $450,000 in cash contributions to a private nonoperating foundation in 2026, the deduction for the latter contributions would be limited to the lesser of (i) $450,000 (30% of AGI) or (ii) $750,000 (50% of AGI) – ($450,000 (the contributions to public charities) – $150,000 (10% of AGI)), which also equals $450,000. Thus, here, the individual would be able to deduct all $900,000 in charitable contributions, up to 60% of AGI.

The OBBBA’s amendment of Sec. 170(b)(1)(G), which contains the 60% limit, applies “for taxable years beginning after” 2017, notwithstanding the general effective date of the OBBBA provision beginning in 2026. The amended language describes the limit on cash contributions to public charities as 60% of AGI over “the aggregate of contributions taken into account” under the 50% limit. If one considers this language in isolation, it suggests an ordering rule under which contributions allowable under the 50% limit are taken into account before contributions allowable under the 60% limit, such that a taxpayer could combine cash contributions to public charities with noncash contributions to public charities to reach the full 60% limit. If the individual in Example 2 made $450,000 in cash contributions to public charities and $450,000 in noncash contributions of non–LTCG property to public charities in 2026, the limit on the cash contributions to charities would be $900,000 (60% of AGI) less the $450,000 in noncash contributions allowable under the 50% limit, or $450,000. Thus, here, too, the individual would be able to deduct all $900,000 in charitable contributions up to 60% of AGI. (The OBBBA also imposed a “floor” on charitable contributions of 0.5% of AGI (Sec. 170(b)(1)(I)) and a modified overall limitation on itemized deductions under Sec. 68, both of which these two modified examples disregard for simplicity.)

The fly in the ointment

While Congress appeared to be trying to permit individuals to stack different kinds of contributions up to 60% of AGI, it appeared to overlook one additional amendment that needed to be made: It failed to eliminate the coordinating provision in Sec. 170(b)(1)(G)(iii)(II). Accordingly, Sec. 170(b)(1)(G) still instructs donors to reduce the 50% limit for the tax year (but not below zero) by any contributions allowed under the 60% limit. This suggests a reverse ordering to that suggested by the OBBBA amendments, indicating that contributions allowed under the 60% limit should be taken first, with any contributions allowed under the 50% limit permitted only to the extent of 50% of AGI, less the 60% contributions.

Returning to the examples, if this coordinating provision is applied, the donor would take a deduction for $450,000 in cash contributions to public charities but then would be allowed a deduction for the noncash contributions only to the extent of $750,000 (50% of AGI) less $450,000 (the 60% contributions), or $300,000. Thus, the donor would again be stuck with total deductions equal to only $750,000, or 50% of AGI.

Guidance looked for

The OBBBA’s amendments to Sec. 170 seem intended to permit donors to combine different kinds of contributions up to a maximum of 60% of AGI. But unfortunately, practitioners still must face the fact that the coordinating provision was not omitted from Sec. 170(b)(1)(G). One possible argument practitioners could make to resolve this dilemma could be that the ordering rule suggested by the OBBBA’s amendments to Sec. 170(b)(1)(G)(i) — that contributions allowable under the 50% limit should be considered prior to contributions allowable under the 60% limit — conflicts irreconcilably with the reverse ordering rule suggested by the older coordinating provision, and thus the OBBBA amendments should be interpreted as impliedly repealing the coordinating provision (see, e.g., Posadas v. National City Bank, 296 U.S. 497 (1936)). To take this position, though, the intention of the legislature “must be clear and manifest” (id). Unfortunately, nothing in the OBBBA’s legislative history comments on the intent behind the amendments to the 60% limit. The best evidence of intent is the JCT’s statement on the ordering intended by the original TCJA provision (noted above), combined with an effective date for the OBBBA’s amendments to Sec. 170(b)(1)(G) that is retroactive to 2018, suggesting that Congress agreed with the JCT’s statement. To avoid uncertainty as to whether this expression of legislative intent is sufficient, Treasury and the IRS will hopefully issue guidance making clear which ordering rule should prevail.

Editor

Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.

For additional information about these items, contact Van Leuven at mvanleuven@kpmg.com.

Contributors are members of or associated with KPMG LLP.

The information in these articles is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230. The information contained in these articles is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. These articles represent the views of the authors only and do not necessarily represent the views or professional advice of KPMG LLP.