Charitable Contributions - Examples Flashcards
Proof of Contribution - By taking a tax deduction, the taxpayer’s actual cost of a gift is less than the gift itself.
For example, assume Paul is in the 24 percent tax bracket. He gives $1,000 to a charitable organization. It costs him $760 because he has given away $1,000 and as a result, lowered his taxes by $240 (0.24 x $1,000).
Application of Carryovers - Any contributions that exceed the deductible gift limitations may be carried over and deducted in the subsequent five years. These carryovers are subject to the limitations that apply in subsequent years. Thus, carryovers may be deducted only to the extent that the limitation of the subsequent year exceeds the contributions made during that year.
For example, assume that for the years 20X4 through 20X6, Joan reports AGI and makes charitable contributions in the following amounts:
20X4 20X5 20X6
AGI $40,000 $40,000 $60,000
Cash contributions subject to the 60% of AGI limitation $29,000 $27,000 $30,000
60% of AGI limitation $24,000 $24,000 $36,000
The amount of the charitable contribution deduction for each year and the order in which the deduction and carryovers are used, are as follows:
20X4 20X5 20X6
Amount of deduction $24,000 $24,000 $36,000
Amount of carryover From 20X4 $5,000 $5,000 $0
From 20X5 $3,000 $2,000
Charitable Annuity and Unitrusts - A Charitable Remainder Annuity Trust (CRAT) is a trust designed to permit payment of a fixed amount annually to a noncharitable beneficiary with the remainder going to charity.
AnnMarie gifted appreciating stock with a basis of $50,000 to a CRAT which sold the stock for $300,000. The CRAT invested the proceeds in bonds paying a fixed 6% per year. This gave AnnMarie an annual income of $18,000 from the CRAT. In contrast, if AnnMarie had sold the stock outside the CRAT the sale would have been subject to a capital gains tax. For example, if AnnMarie’s capital gains rate was 15% then the tax would have been $37,500 ($300,000 minus the basis of $50,000 times 15%) and AnnMarie would net only $262,500 after the sale. If AnnMarie then bought bonds paying 6% with the proceeds, her yearly income would have been $15,750 or $2,250 less than the income generated from the CRAT. AnnMarie’s contribution to the CRAT enabled her to receive an income tax deduction for the present value of the trust’s remainder interest in the year the trust was established. And the appreciation on the stocks will be out of AnnMarie’s gross estate when she dies.
Deduction Limitations - 30% Limitation - A 30% AGI limitation rule applies under certain circumstances. Contributions of capital gain property to public charities are generally valued at the property’s FMV but are subject to an overall limit of 30% of AGI instead of a 50% limit.
For example, Joy donates a painting to the local university during a year in which she has an AGI of $50,000. The painting, which cost $10,000 several years before, is valued at $30,000 at the time of the gift. The university exhibits the painting in its art gallery. As the painting is put to a use related to the university’s purpose, the amount of Joy’s contribution is $30,000. The amount of Joy’s charitable deduction for the year, however, is limited to $15,000 (0.30 × $50,000 AGI) unless she elects to reduce the value of the contribution by the long-term capital gain. Joy can carry the remaining $15,000 deduction forward to offset her future itemized taxes for up to 5 years.
The overall deduction limitation of 30% of AGI also applies to the contribution of all types of property other than capital gain property, such as cash and ordinary income property donated to a private nonoperating foundation. However, the deductibility of certain contributions to this type of charity may be subject to even further restrictions.
Deduction Limitations - Contributions with Benefits Received - A charitable income tax deduction is allowed to the extent that the value of the transfer exceeds any value received by the donor.
For example: If a taxpayer pays $5.00 for a box of Girl Scout cookies, and a comparable box of cookies at the grocery store costs $3.00, the taxpayer has made a charitable contribution of the difference, in this case $2.00.
Applying the Deduction Limitations - Cash gifts donated to charity are deductible up to 60% of the donor’s AGI. When cash contribution amounts exceed the 60% threshold, the excess can be carried-over and deducted over 5 years.
For example, during a year when Ted’s AGI is $70,000, he donates $29,000 in cash to his church and $18,000 in cash to a private nonoperating charity. The church contribution is initially subject to the 60% limitation and is fully deductible because the $29,000 contribution is less than the limitation amount of $42,000 (0.60 × $70,000).
Ted’s deduction for the contribution to the private nonoperating charity (a 30% charity) is limited to $13,000 (The lesser of the three amounts):
Description Amount in Dollars
The actual contribution $18,000
The remaining 60% limitation after the
contribution to Ted’s church [(0.60 × $70,000) - $29,000] $13,000
30% of AGI (0.30 x $70,000) $21,000
Ted will have a carry-over deduction of $5,000 that can be taken next year, and if necessary, for 5 additional tax years after the year in which the contributions were made. Therefore, the carry-over deduction can be used to offset Ted’s future income.
Applying the Deduction Limitations - Gifting Cash and Property - The overall charitable income tax deduction limit for non-cash contributions of property for a given tax year is 50% of the taxpayer’s contribution base. When cash contributions are also made during the same year, the overall 50% limit is first reduced by the cash contribution amount. Next, deductions are taken from 50% gifts, then from 30% gifts, and lastly from 20% gifts.
For example, Lauren has an AGI of $250,000. She made a cash gift of $60,000 to a local women’s shelter and she gifted $90,000 in stocks she owned for six years to the city’s food pantry, which are both qualified charities. Lauren’s gift of cash is within the 60% of AGI limitations ($150,000). Her overall contribution limit for making gifts of property is 50% of AGI or $125,000. Her maximum deduction for gifting the FMV of the stock is 30% of AGI or $75,000. However, Lauren can only deduct $65,000 for the stocks this year: AGI limit $125,000—cash gift $60,000 = $65,000. She can carry-forward the remaining tax deduction of $10,000 for up to 5 additional tax years.
Contribution of Services - When a taxpayer renders services to a qualified charitable organization, the taxpayer may only deduct the unreimbursed expenses incurred incident to rendering the services. These items include out-of-pocket transportation expenses, the cost of lodging, 50% of the cost of meals while away from home, and the cost of a uniform without general utility that is required to be worn in performing the donated services. Instead of the actual costs of operating an automobile while performing the donated services, the law permits a deduction of 14 cents per mile.
For example, during the current year, Tony spends a total of 100 hours developing an accounting system for the local council of the Boy Scouts of America. As an accountant, Tony earns $200 per hour. During the year, Tony also drives his car a total of 500 miles while performing this service for the Boy Scouts of America. If he uses the automatic mileage method to compute the amount of the charitable contribution, he can deduct $70 (0.14 X 500). No deduction is available for the value of Tony’s 100 hours of contributed services.
Contribution of Capital Gain Property - Donating LTCG stock - With a charitable gift of appreciated securities held long-term, the donation you make and the deduction you get are greater than they would be if you were to sell the shares and donate the cash proceeds instead. That is because when you donate shares, you avoid paying the capital gains tax.
Suppose you can either (1) donate $50,000 in stock held for more than one year or (2) sell the stock first and donate the proceeds. The stock has a cost basis of $10,000. You have a 40% combined federal and state tax rate on your income and a combined 20% tax rate on capital gains. If the stock is sold, the FMV of the stock minus cost basis = $40,000.
Example Factors Stock Donation Cash Donation
Combined federal & state income taxes 40% 40%
Tax rate & amount for selling stock Not applicable 20% / $8,000 (0.2 × $40,000)
Net amount to donate $50,000 $42,000
Tax savings $20,000 $16,800
Unrelated Use Property - A capital gain property that is also a tangible personal property, contributed to a public charity and used by the organization for purposes unrelated to charity functions, is called an unrelated use property. In such exceptional situations, the amount of the contribution deduction is equal to the property’s FMV minus the capital gain that would be recognized if the property were sold at its FMV (the property’s adjusted basis).
For example, Laura purchases a painting for $3,000. Several years later she contributes the painting to a local college. The FMV of the painting is $5,000 at the time the property is contributed. The painting is both tangible personal property and capital gain property. The college places the painting in the library for display and study by art students. As the college does not use the painting for purposes unrelated to its function as an educational institution, the amount of Laura’s contribution is equal to the painting’s FMV ($5,000). On the other hand, if the college had sold the painting immediately after receiving it, the presumption is that the property’s use was unrelated to the college’s tax-exempt purpose. In this case, Laura’s contribution is only $3,000.
Private Nonoperating Foundation - The amount of the deduction for a contribution of property, other than certain qualified stock, to a private nonoperating foundation is the property’s FMV, reduced by the capital gain that would be recognized if the property were sold at its FMV on the date of the contribution. This means that generally the deductible amount of the contribution is the property’s adjusted basis.
For example, Betty purchases land in 1986 for $10,000. In the current year, she contributes the land to the United Way. At the time of the contribution, the FMV of the property is $25,000. As the land is capital gain property donated to a public charity, the amount of the contribution is $25,000 (its FMV).
On the other hand, if Betty donates the land to the Cherry Foundation, a private nonoperating foundation, the amount of the contribution is $10,000 ($25,000 -$15,000 capital gain that would be recognized if the land were sold).
Contribution of Ordinary Income Property - .The general rule is that if ordinary income property is contributed to a charitable organization, the deduction is equal to the property’s FMV minus the amount of gain that would be recognized if the property were sold at its FMV on the date of the contribution. In most cases, this deduction is equal to the property’s adjusted basis. This rule applies regardless of the type of charitable organization to which the property is donated.
Ordinary income property includes inventory, works of art or manuscripts created by the taxpayer, capital assets that have been held for one year or less, and Section 1231 property, to the extent a sale would result in the recognition of ordinary income due to depreciation recapture.
For example, during the current year, Bart purchases land as an investment for $10,000. Five months later he contributed the land to the United Way. At the time of the contribution, the property’s FMV is $15,000. The amount of Bart’s contribution is $10,000 ($15,000 − [$15,000 − $10,000]) because he held the land for less than one year.
As another example, Paul purchased a truck a few years ago for $20,000. During the current year, Paul donates the truck previously used in his business to a local community college. At the time of the contribution, the truck’s adjusted basis is $5,000 and its FMV is $8,000. As Paul would have recognized a $3,000 gain (all ordinary income under Section 1245) if the truck were sold at its FMV, the amount of the contribution is $5,000 ($8,000 − $3,000), which is equal to the truck’s adjusted basis
Donation of Inventory by a Corporation -
The inventory is to be used by the charity solely for the care of the ill, needy or infants
Donation of scientific equipment constructed by the taxpayer and donated to a college, university or qualified research organization, to be used for research, experimentation, or research training in the physical or biological sciences.
Contributions of computer technology and equipment donated to public libraries and elementary and secondary schools.
In all three cases the amount of charitable contribution is the property’s FMV, reduced by 50% of the ordinary income, if the property were to be sold at its FMV. However, the amount of the contribution is limited to twice the basis of the property.
For example, during the current year, Able Corporation, a manufacturer of medical supplies, donates some of its inventory to the American Red Cross. The Red Cross intends to use the inventory for the care of the needy and ill. At the time of the contribution, the FMV of the inventory is $10,000. Able’s basis in the inventory is $3,000. As this transaction qualifies under the exception, the amount of Able’s contribution (before any limitations are applied) is $6,500 [$10,000 − (0.50 × $7,000)]. But the actual amount of the contribution is limited to $6,000 (two times the $3,000 basis in the property).
Remainder Interests - . If the remainder interest in a personal residence or farm is gifted to a qualified organization with a condition that the donor will be residing there for life, then the donor can take an income tax deduction for the value of the future gift.
For example, if Robin Kay gives her home or her farm to a qualified organization with the stipulation that she may live there for life, she may take a current income tax deduction for the value of the future gift. This assumes, of course, that the gift is irrevocable.
Another circumstance in which a charitable contribution of less than the donor’s entire interest could generate an income tax deduction occurs when a donor makes a gift to a qualified charitable organization of a remainder interest in real property granted solely for conservation purposes.
