Income limitations on charitable deductions

Income
Limits
on
Charitable
Deductions
Russell James, J.D., Ph.D., CFP®
Professor, Texas Tech University

Income
Limits
on
Charitable
Deductions
Part I: Introduction

If you want to ask
BIGyou need to ask for
gifts of assets.
If you ask for gifts
of assets, you need
to know these
rules

Charitable
gifts can
sometimes
be deducted
from taxable
income,
thereby
reducing
taxes owed

Charitable deductions are limited to
20%, 30%, or 50% of income
depending on the gift and recipient

Why should we
limit charitable
deductions?

Encouraging
giving is good,
but at least
some revenue
should go to
the
government

Otherwise,
wealthy
people could
pay zero
taxes by
annually
transferring
assets to
charity

Taxes? Oh, no, we
don’t pay taxes.

Why are
people making
such large
donations,
anyway?

Are people taking vows of poverty and
giving away everything they earn?

Actually, the
limits are an
issue with
gifts from
assets
where
wealth is far
greater than
annual
income

A common issue with wealthy
retiree donors who
have limited
taxable
income
but large
assets

Income
Limits
on
Charitable
Deductions
Part II: Gifts to public
charities

Some gifts
may be
deducted up
to 50% of
income if
given to a
public charity,
government,
or an
operating
private
foundation
Note: The term “income” in these
slides means adjusted gross income
for the year of the gift excluding any
net operating loss carryback

Public
CharityAnything EXCEPT long-
term capital gain
or a farmer giving a
qualified conservation easement
50% limit

50% limit
Money
(given or spent
performing services
for the charity)
Public
Charity

50% limit
Any ordinary
income property
Public
Charity
Ex: Creations by the donor

Public
Charity
50% limit
Any ordinary
income property

Public
Charity
Any ordinary
income property
50% limit
Short-Term Capital
Gain Property
(held 1 year or less)

Cash and ordinary income property are
treated the same because they aren’t
long-term capital gain property

1990 Paid: $1
Current Value: $25
Long-term (>1 year) capital gain property
If fair market value of
gain property can be
deducted, then gifting to
a public charity is
30% limit
If only basis of gain
property can be
deducted, then gifting to
a public charity is
50% limit

1990 Paid: $600 acre
Current Value: $2,800/acre
Long-term capital gain property
deducted at fair market value
and given to public charity
30% limit

1990 Paid: $600 acre
Current Value: $2,800/acre
“Special election” values all long-
term capital gain gifts in a year at
basis, then such gifts to public charity
50% limit

A similar idea applies to long-term
capital gain tangible personal property
(All the stuff in your garage, including cars, jewelry, artwork)

Public Charity1990 Paid $1
Current Value: $25
50% limitlong-term capital gain tangible personal property
valued at BASIS due to
“unrelated use”

Public Charity1990 Paid $1
Current Value: $25
30% limitlong-term capital gain tangible personal property
valued at FAIR MARKET VALUE due to “related
use”

Part III: Gifts to private
foundations
Income
Limits
on
Charitable
Deductions

30% limit
Not “to” but “for the use of” charity
Money given “in trust” to another entity where charity gets
current benefit such as a Charitable Lead Trust or paying
premiums for charity-owned life insurance
CLT or
Insurance
Company
Current
Benefit
20% limit
long-term capital gain “for the use of” charity

So, that covers gifts
to public charities.
What’s about gifts to
private foundations?

Anything EXCEPT long-
term capital gain
30% limit
Bill & Melinda Gates
Private Foundation
Private
Foundation
(non-operating)

30% limit
Money
(given or spent
performing services
for the charity)
Private
Foundation
(non-operating)
Private Foundation

30% limit
Any ordinary
income property
Ex: Creations by the donor
Private
Foundation
(non-operating)
Private Foundation

30% limit
Any ordinary
income property
Private
Foundation
(non-operating)
Private Foundation

Any ordinary
income property
30% limit
Private
Foundation
(non-operating)
Private Foundation
Short-Term Capital
Gain Property
(held 1 year or less)

20% limit
1990 Paid $1
Current Value: $25
Private Foundation
Long-Term Capital Gain Property
Private
Foundation
(non-operating)

20% limit
Private Foundation
Private
Foundation
(non-operating)
Long-Term Capital Gain Property
(including tangible personal property)
Current Value: $25
1990 Paid $1

C-corp: limited to 10%
of taxable income with
5-year carry forward.
S-corp: passes through all
deductions to
shareholders.
Corporate Giving

Current Value: $25
1990 Paid $1
Long-term capital gain property valued at basis
“unrelated” use tangible
personal property
Public
Charity
Public
Charity
Anything except long-term
capital gain property (e.g.,
cash or ordinary income property)
special
election

Current Value: $25
1990 Paid $1
“related use” tangible
personal property
Public
Charity
Private Foundation
(non-operating)
no special
election
Private Foundation
Long-term capital gain property valued at fair
market value
Anything except long-term capital gain property
(e.g., cash or ordinary income property)

Any long-term capital gain property
Current Value: $25
1990 Paid $1 Private Foundation
(non-operating)
Private Foundation

Part IV: Carryover
deductions
Income
Limits
on
Charitable
Deductions

What happens if
you give more
than the limit?

The excess
deduction may
be used later (as
soon as
charitable
deductions do
not exceed the
income limits),
but must be used
within five years.

Unused charitable
deductions may be carried
over for up to 5 years
Year 1
Charitable
Deduction
Maximum
for Each Year
Deductible
in Year 1
(under
limit)
Not
Deductible
in Year 1
(over limit)
Deductible
Carryover
Deductible
Carryover
Deductible
Gifts Made
in Year 2
Deductible
Gifts Made
in Year 3
Deductible
Gifts Made
in Year 4
Year 4Year 2 Year 3

Not
Deductible
in Year 2
(over limit)
Oldest carryover
deductions are used first
Charitable
Deduction
Maximum
for Each Year
Deductible
in Year 1
(under
limit)
Not
Deductible
in Year 1
(over limit)
Deductible
Carryover
Deductible
Carryover
Deductible
Gifts Made
in Year 3
Deductible
Gifts Made
in Year 4
Deductible
Gifts Made
in Year 5
Deductible
in Year 2
(under
limit)
Year 1 Year 4Year 2 Year 3 Year 5

What happens
to a carryover
deduction if I
don’t itemize
(i.e., just take
the standard
deduction)?

Charitable
Deduction
Maximum
for Each Year
Deductible
in Year 1
(under
limit)
Not
Deductible
in Year 1
(over limit)
Carryover
Eliminated
Deductible
Carryover
Potentially
Deductible
Gifts Made
in Year 2
Deductible
Gifts Made
in Year 3
Deductible
Gifts Made
in Year 4
The carryover is reduced as if you took the
maximum possible charitable deduction
In year 2 no gifts
were deducted
because the
standard deduction
was used
Year 1 Year 4Year 2 Year 3

What happens to a carryover
deduction if the donor dies?

The carryover
deduction is
lost at death.
For joint returns, the carryover that could have
been claimed by the decedent if the couple had
filed separately is lost.

Part V: Complex combinations
Income
Limits
on
Charitable
Deductions

How do the different
limits work together?

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
Each limitation rule is like a glass that can
only hold so much. For each glass, you
must find out if the total gifts for the year
of that type will fit.
All gifts All gifts
of LT capital gain
(except “special election”)
All gifts
to private
foundations
or “for the use of” public charities
All gifts of LT capital
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
Any overflow in any category is carried
over. Some gifts may be carried over for
more than one reason (i.e., they may spill
out of more than one glass).
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
$30,000 FMV LT capital gain
property to public charity
$20,000 cash to private foundation
$100,000 income
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
$100,000 income
 $50,000



$30,000
$20,000
$0
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
 $50,000



$30,000
$20,000
$0
No carryover.
All deductions
are allowed in
the current year.
$100,000 income
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

If not all gifts can be
deducted (i.e., there is
carry over) which gifts
get deducted first?

Current Value: $25
1990 Paid: $1
Current Value: $25
1990 Paid: $1
Cash or ordinary income property
LT capital or tangible personal property
valued at basis
Cash or ordinary income property
LT capital or tangible
personal property
valued at FMV
Private Foundation
Private Foundation
LT capital or tangible
personal property
(any)

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
$30,000 cash to public charity
$100,000 income
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
$100,000 income
X $60,000



$30,000
$0
$0
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
$100,000 income


$30,000
$0
$0
$20k FMV
capital gain
property
$30k cash
$10k FMV
capital gain
propertyX

All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income



$30,000
$0
$0
$10,000 carryover of
FMV capital gain
charitable deduction
$20k FMV
capital gain
property
$10k FMV
capital gain
propertyX

All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations
$30k cash

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
$100,000 income
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
$100,000 income
X $63,000
X

$56,000
$0
$5,000

Holds
30%
of Income
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
$100,000 income
 $0
$5,000

Holds
30%
of Income
$48k FMV
capital gain
property
$2k cash to
public charity
$8k FMV
capital gain
propertyX


$5k cash to
private f.X
$30k FMV
capital gain
property
$26k FMV
capital gain
propertyX
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
 $0
$5,000

Holds
30%
of Income
$48k FMV
capital gain
property
$2k cash to
public charity
$8k FMV
capital gain
propertyX


$5k cash to
private f.X
$30k FMV
capital gain
property
$26k FMV
capital gain
propertyX

$5,000 carryover of cash
to private foundations
FMV LT capital gain
property (includes the
$8,000 already carried
over for other reasons)
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

$5,000 cash to private foundation: Deduct $0
$2,000 cash to public charity: Deduct $2,000
$56,000 FMV LT capital gain property to public
charity: Deduct $30,000
+ $5,000 carryover of
cash to private
foundations charitable
deduction
+ $26,000 carryover of FMV
LT capital gain property
charitable deduction

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
Holds
30%
of Income
$20,000 LT capital gain property to
private foundation
$100,000 income
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
$100,000 income
X

$40,000
$20,000
$20,000

Holds
30%
of Income

private foundation
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations
$40,000

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
$100,000 income
 $20,000
$20,000
Holds
30%
of Income
$40,000
private foundation
$20k FMV
capital gain to
public charity
$10k capital
gain to priv. f.

$10k capital
gain to priv. f.X
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations

Holds
50%
of
Income
Holds
20%
of Income
Holds
30%
of Income
 $20,000
$20,000

Holds
30%
of Income

$20k FMV
capital gain to
public charity
$10k capital
gain to priv. f.

$10k capital
gain to priv. f.X
capital gain property given
to a private foundation
All gifts All gifts
of LT capital gain
All gifts
to private
foundations
gain to private
foundations
$40,000

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