Tax 7-5 Analyze a situation involving a charitable contribution to calculate the maximum allowable income tax deduction for the current year.

Question 1

Charitable Contributions

Normally, a charitable gift of only a portion of a donor’s entire interest in property is nondeductible. Identify four statutory exceptions to this rule.

7-5

Answer 1

The four exceptions to the rule are:

1. a gift of an undivided portion of a donor’s entire interest
2. a gift of a remainder interest in a personal residence or farm
3. a gift to a public charity of a remainder interest in real property granted solely for conservation purposes
4. a gift of a partial interest transferred through a qualifying form of trust.

Question 2

Charitable Contributions

Define what is meant by a qualifying charitable organization.

7-5

Answer 2

It is a group organized and operated exclusively for religious, scientific, literary, or educational purposes or any other group specifically approved by the IRS as a qualified charitable organization.

Question 3

Charitable Contributions

Explain why it is more beneficial to a taxpayer to gift appreciated rather than nonappreciated property to charity.

7-5

Answer 3

A taxpayer may be allowed a charitable deduction for the fair market value of appreciated property on the date of a gift. Thus, the deduction includes appreciation on the property; this also avoids tax on what otherwise would be recognized as income if the property were sold.

Question 4

Charitable Contributions

Identify the amount of deduction that is allowable if gifts of the following types of property are made to a qualifying charity.

ordinary income property

On what is the deduction based?

adjusted basis or fair market value

7-5

Answer 4

deduction based on adjusted basis of the property

Question 5

Charitable Contributions

Identify the amount of deduction that is allowable if gifts of the following types of property are made to a qualifying charity.

long-term capital gain property

On what is the deduction based?

fair market value of the property
or
adjusted basis

7-5

Answer 5

deduction based on the fair market value of the property

Question 6

Charitable Contributions

Identify the amount of deduction that is allowable if gifts of the following types of property are made to a qualifying charity.

use-unrelated tangible personal property

On what is the deduction based?

fair market value of the property
or
adjusted basis

7-5

Answer 6

deduction based on adjusted basis

Question 7

Charitable Contributions

Identify the amount of deduction that is allowable if gifts of the following types of property are made to a qualifying charity.

use-related tangible personal property

On what is the deduction based?

fair market value of the property
or
adjusted basis

7-5

Answer 7

deduction based on fair market value as long as property is held in excess of one year Return

Question 8

Charitable Contributions

Identify which types of charitable organizations would be included in each of the following categories.

30% organizations

7-5

Answer 8

private nonoperating foundations, veteran groups, fraternal associations, other not-for-profit associations

Question 9

Charitable Contributions

Identify which types of charitable organizations would be included in each of the following categories.

50% organizations

7-5

Answer 9

churches, schools, hospitals, governmental units, community foundations, Red Cross, United Way

Question 10

Charitable Contributions

Charitable contributions of long-term capital gain property require the application of additional limitations.

Explain the 30% of AGI limitation on gifts of long-term capital gain property.

7-5

Answer 10

Generally, the charitable deduction for gifts of long-term capital gain property to a public charity may not exceed 30% of the taxpayer’s AGI in a given year.

Question 11

Charitable Contributions

Charitable contributions of long-term capital gain property require the application of additional limitations.

Explain the effect of the 50% election.

7-5

Answer 11

This election applies only to a contribution of long-term capital gain property to a 50% organization. If the taxpayer elects a deduction of up to 50% of AGI in a given year, then the deduction is based on the taxpayer’s basis in the contributed property (instead of the fair market value where the 30% of AGI limitation is used).

Question 12

Charitable Contributions

Identify the tax treatment for excess charitable contributions made to either a 50% or a 30% organization.

7-5

Answer 12

The taxpayer is entitled to carry forward the excess contribution for the lesser of five years or until his or her death.

Question 13

Charitable Contributions

Identify the tax treatment of charitable contributions by nonitemizers. Can they receive a deduction?

7-5

Answer 13

For those contributions made after 1986, there is no charitable deduction for nonitemizers.

Question 14

Charitable Contributions

Calculate the maximum charitable contribution deduction allowed for the current tax year in each of the following situations.

Helen Weatherford has an AGI of $18,000 and has contributed $1,800 to charity. She does not itemize deductions.

7-5

Answer 14

Helen’s maximum charitable deduction is $0 since she does not itemize deductions.

Question 15

Charitable Contributions

Calculate the maximum charitable contribution deduction allowed for the current tax year in each of the following situations.

Marge Patterson has an AGI of $110,000. She donated to the state university some stock that was valued at $61,000 and that had been held for less than one year at the date of gift. Her basis in this stock was $55,000.

7-5

Answer 15

Since it is short-term capital gain property, the deduction is limited to her basis of $55,000, which does not exceed 50% of her AGI.

Question 16

Charitable Contributions

Calculate the maximum charitable contribution deduction allowed for the current tax year in each of the following situations.

Jim Swenson has an AGI of $140,000. He made a cash contribution of $45,000 to a private nonoperating foundation.

7-5

Answer 16

Ordinary income property to a 30% organization uses basis, with a limit of 30% of AGI. Jim’s maximum charitable deduction is $42,000. He can take a deduction for the $45,000 gift, but it is limited to 30% of his AGI (or $42,000), with a $3,000 charitable carry forward.

Question 17

Charitable Contributions

Calculate the maximum charitable contribution deduction allowed for the current tax year in each of the following situations.

Louis Martino donated a painting to the community art museum. The painting is valued at $41,500. Louis paid only $10,000 for the painting five years ago. He has an AGI of $100,000.

7-5

Answer 17

Louis’s maximum deduction is $30,000 (30% of AGI), with an $11,500 carryforward. The deduction for long-term capital gain property (use-related tangible personalty, in this case) is based on the FMV of the property, but is limited to 30% of AGI for gifts to 50% organizations.

Question 18

Charitable Contributions

2. Define what is meant by a qualifying charitable organization.

7-5

Answer 18

It is a group organized and operated exclusively for religious, scientific, literary, or educational purposes or any other group specifically approved by the IRS as a qualified charitable organization.

Question 19

Charitable Contributions

3. Explain why it is more beneficial to a taxpayer to gift appreciated rather than nonappreciated property to charity.

7-5

Answer 19

A taxpayer may be allowed a charitable deduction for the fair market value of appreciated property on the date of a gift. Thus, the deduction includes appreciation on the property; this also avoids tax on what otherwise would be recognized as income if the property were sold.

Question 20

Charitable Contributions

4. Identify the amount of deduction that is allowable if gifts of the following types of property are made to a qualifying charity.
   a. ordinary income property

fair market value of the property
or
adjusted basis

7-5

Answer 20

deduction based on adjusted basis of the property

Question 21

Charitable Contributions

4. Identify the amount of deduction that is allowable if gifts of the following types of property are made to a qualifying charity.
   b. long-term capital gain property

fair market value of the property
or
adjusted basis

7-5

Answer 21

deduction based on the fair market value of the property

Question 22

Charitable Contributions

4. Identify the amount of deduction that is allowable if gifts of the following types of property are made to a qualifying charity.
   c. use-unrelated tangible personal property

fair market value of the property
or
adjusted basis

7-5

Answer 22

deduction based on adjusted basis

Question 23

Charitable Contributions

4. Identify the amount of deduction that is allowable if gifts of the following types of property are made to a qualifying charity.
   d. use-related tangible personal property

fair market value of the property
or
adjusted basis

7-5

Answer 23

deduction based on fair market value as long as property is held in excess of one year

Question 24

Charitable Contributions

5. Identify the limits on the amount of charitable contributions that a taxpayer may deduct in a given year.

7-5

Answer 24

The limits are as follows:

a. 50% of AGI for gifts of ordinary income property to a public charity
b. 30% of AGI for gifts of ordinary income property to a 30% organization (veteran groups, etc.)
c. 30% of AGI for indirect gifts (such as mileage)
d. 30% of AGI for gifts of long-term capital gain property donated to a 50% organization
e. 20% of AGI for gifts of long-term capital gain property donated to a 30% organization

Question 25

Charitable Contributions

6. Identify which types of charitable organizations would be included in each of the following categories.
   a. 30% organizations

7-5

Answer 25

private nonoperating foundations, veteran groups, fraternal associations, other not-for-profit associations

Question 26

Charitable Contributions

6. Identify which types of charitable organizations would be included in each of the following categories.
   b. 50% organizations

7-5

Answer 26

churches, schools, hospitals, governmental units, community foundations, Red Cross, United Way

Question 27

Charitable Contributions

7. Charitable contributions of long-term capital gain property require the application of additional limitations.
   a. Explain the 30% of AGI limitation on gifts of long-term capital gain property.

7-5

Answer 27

Generally, the charitable deduction for gifts of long-term capital gain property to a public charity may not exceed 30% of the taxpayer’s AGI in a given year.

Question 28

Charitable Contributions

7. Charitable contributions of long-term capital gain property require the application of additional limitations.
   b. Explain the effect of the 50% election.

7-5

Answer 28

This election applies only to a contribution of long-term capital gain property to a 50% organization. If the taxpayer elects a deduction of up to 50% of AGI in a given year, then the deduction is based on the taxpayer’s basis in the contributed property (instead of the fair market value where the 30% of AGI limitation is used).

Question 29

Charitable Contributions

9. Identify the tax treatment for excess charitable contributions made to either a 50% or a 30% organization.

7-5

Answer 29

The taxpayer is entitled to carry forward the excess contribution for the lesser of five years or until his or her death.

Question 30

Charitable Contributions

10. Identify the tax treatment of charitable contributions by nonitemizers.

7-5

Answer 30

For those contributions made after 1986, there is no charitable deduction for nonitemizers.

Question 31

Charitable Contributions

11. Calculate the maximum charitable contribution deduction allowed for the current tax year in each of the following situations.
    c. Karenanne Norman has an AGI of $250,000. She gifted to her church a vacant lot with a fair market value of $200,000 and an adjusted basis of $25,000. She purchased the lot 15 years ago as an investment.

7-5

Answer 31

$75,000

Long-term capital gain property to a 50% organization uses the fair market value of the property, with a limit of 30% of AGI. Her maximum deduction for the current year is .30 × $250,000 = $75,000, with a $125,000 charitable carryforward.

Question 32

Charitable Contributions

11. Calculate the maximum charitable contribution deduction allowed for the current tax year in each of the following situations.
    e. Roger Porter has an AGI of $50,000. He donated a valuable first-edition book to the Red Cross. Roger paid $2,500 for the book five years ago. Today it is valued at $10,000.

7-5

Answer 32

$2,500

Use-unrelated tangible personalty donated to a 50% organization uses basis, with a limit of 50% of AGI. His maximum deduction is $2,500 since the book is not instrumental to the organization’s exempt purpose; the deduction is therefore limited to cost or basis. The deduction for use-unrelated tangible personalty is based on the basis of the property, with a 50% of AGI limitation for a contribution to a public charity.

Question 33

Charitable Contributions

11. Calculate the maximum charitable contribution deduction allowed for the current tax year in each of the following situations.
    g. Cindy Flood has an AGI of $150,000. She owns stock with a fair market value of $95,000 and a basis of $80,000. She has owned the stock for three years. She will contribute the stock to her church.

7-5

Answer 33

$75,000

The maximum deduction is $75,000. If the 50% election were made, she would use the basis of the stock ($80,000, but would be limited to 50% of AGI, (or $75,000), with a $5,000 carryforward. Without the election, she would use the FMV of the stock and be limited to a deduction of 30% of AGI, or $45,000 with a carryforward of $50,000.

Question 34

Charitable Contributions

Module Check

6. Kris Swenson anticipates adjusted gross income of $100,000 for the current tax year. She contributed appreciated real estate to her alma mater, Sinton State Technological College, a public, nonprofit university. Kris’s adjusted basis in this real estate is $20,000. The real estate has a current fair market value of $70,000. Kris has owned the real estate for 15 years.

If Kris does gift the real estate to Sinton, what is the maximum allowable charitable deduction she can receive in the current tax year?

$20,000

$30,000

$50,000

$70,000

(LO 7-5)

Answer 34

$30,000

A gift of long-term capital gain property to a 50% organization is based on the FMV of the property, with the deduction for the current year limited to 30% of AGI.

Question 35

Charitable Contributions

Module Check

11. Which one of the following types of organizations is not considered a 50% organization for charitable contribution purposes?
    a. veterans groups
    b. churches
    c. schools
    d. hospitals

(LO 7-5)

Answer 35

Veterans groups

Public charities, such as churches, schools, and hospitals, are all considered to be 50% organizations, whereas private charities, such as veterans groups, are considered to be 30% organizations.

Question 36

Charitable Contributions

Module Check

12. Kurt Swanson anticipates his adjusted gross income will be $100,000 for the current tax year. He is considering making a gift of appreciated stock to his alma mater, Regis University. His basis in this stock is $48,000. The stock has a current fair market value of $60,000. Kurt has owned the stock for four years.

If Kurt gifts the stock to Regis, what is the maximum allowable charitable deduction that Kurt can receive in the current tax year?

$20,000

$30,000

$48,000

$50,000

(LO 7-5)

Answer 36

$48,000

If a taxpayer donates LTCG property to a 50% organization, the taxpayer typically is restricted to a charitable contribution deduction of 30% of AGI, with the deduction being based on the fair market value of the LTCG property. However, in this case, the 50% election, using the basis of the property, results in a larger current year deduction.

Question 37

Charitable Contributions

Module Check

22. The charitable contribution deduction for individuals who do not itemize deductions is
    a. limited to 20% of AGI.
    b. limited to 30% of AGI.
    c. not allowed.

(LO 7-5)

Answer 37

not allowed.

Question 38

Charitable Contributions

23. Charitable gifts may reduce an individual’s
    a. estate.
    b. income tax liability.
    c. estate and income tax liability.

(LO 7-5)

Answer 38

estate and income tax liability.

Charitable contributions will reduce an individual’s income tax liability, and because the contributions are not added back for estate tax purposes, they will reduce the estate as well.

Question 39

Charitable Contributions

25. Roger Forman has an AGI of $100,000. He donated a valuable first-edition book to the United Way. Roger paid $5,000 for the book 10 years ago; today it is valued at $40,000. What is the amount of Roger’s current year charitable contribution deduction?

$5,000

$30,000

$40,000

(LO 7-5)

Answer 39

$5,000

The deduction for use-unrelated tangible personalty is based on the basis of the property, with a 50% of AGI limitation for a contribution to a public charity. Since the book is not instrumental to the organization’s exempt purpose, the deduction is limited to the basis of the asset.

Question 40

Charitable Contributions

11. Kurt Swanson anticipates adjusted gross income of $100,000 for the current tax year. He is considering making a gift of appreciated stock to his alma mater, Regis University. His basis in this stock is $48,000. The stock has a current fair market value of $60,000. Kurt has owned the stock for four years.

If Kurt gifts the stock to Regis, what is the maximum allowable charitable deduction that Kurt can receive in the current tax year?

(LO 7-5)

Answer 40

$48,000

The deduction for a donation of LTCG property to a 50% organization typically is restricted to 30% of AGI, with the deduction based on the fair market value of the asset. However, in this case, the 50% election, using the basis of the property, results in a larger current-year deduction. If the 50% election is made, the basis of the property must be used.

Question 41

Charitable Contributions

32. Kris Swenson anticipates adjusted gross income of $100,000 for the current tax year. She is considering making a gift of appreciated real estate to her church, a qualified charitable institution. Kris’s adjusted basis in this real estate is $20,000. The real estate has a current fair market value of $50,000. Kris has owned the real estate for 15 years.

If Kris does gift the real estate to her church, what is the maximum allowable charitable deduction Kris can receive in the current tax year?

(LO 7-5)

Answer 41

$30,000

The current deduction for a contribution of long-term capital gain property to a 50% organization is based on FMV but is limited to 30% of AGI. This results in a $30,000 current year deduction, with a $20,000 carryforward.

Question 42

Practice Test 2

Charitable Contributions

55. Gary Shelton has an AGI of $150,000. He donated to the local church stock valued at $90,000 that was purchased eight months ago. His basis in this stock was $80,000. What is Gary’s maximum allowable charitable contribution for the current year?

$45,000

$75,000

$80,000

$90,000

(LO 7–5)

Answer 42

$75,000

The overall charitable deduction is limited to 50% of AGI, or $75,000. Since the stock was not held for a year, the deductible amount would be limited to the basis of $80,000. Since the 50% limitation applies, the excess of the $80,000 basis over the $75,000 deduction, or $5,000, would be allowable as a carryover to the subsequent year.

Question 43

Practice Test 2

Charitable Contributions

56. Carl Taylor has an AGI of $200,000. He donated to the local church vacant land valued at $130,000 that was purchased eight years ago. His basis in this land was $110,000.

What is Carl’s maximum allowable charitable contribution for the current year?

$33,000

$39,000

$60,000

$100,000

(LO 7–5)

Answer 43

$100,000

The 50% election would provide Carl with the maximum current year deduction. If Carl makes a 50% election, he must utilize the basis of the property, but may deduct up to 50% of AGI. This yields a $100,000 current-year deduction with a $10,000 carryforward. If no 50% election were made, the deduction would be based on the fair market value of the property, but would be limited to 30% of AGI, which is $60,000 with a $70,000 carryforward.