Charitable giving to tax exempt organizations combines your philanthropic intent with tax planning. The amount of your income tax deduction depends on the following: Your contribution base; the value of the gift itself; whether the charity is a public or private charity; whether the gifted property is a capital gain property or an income producing property; and whether you have other charitable deductions. Let’s examine the rules.
Your “contribution base” is your adjusted gross income, not including any net operating loss carry-backs. Your current year deduction is at a minimum limited to a certain percentage of your current contribution base (discussed below). Such percentage depends on whether the charity is a “public charity” or a “private charity,” and whether the gift is cash, “capital gain” property or “ordinary income” property (see below). Additional complex limits may apply if other charitable deductions are taken that may further lessen the deduction.
The IRS requires records be kept for gifts over $250. Gifts over $5,000 require appraisals. Determining the value of the gift can be difficult. For example, a gift of any artwork (e.g., painting or sculpture) or collectible (e.g., coins, stamps, etc.) requires a “qualified appraisal performed by an independent, qualified appraiser”. A qualified appraiser is someone with the relevant expertise and professional credentials under IRS regulations. The appraiser must be someone independent of the donor.
Tax exempt organizations are either “public charities” or “private charities”. They are exempt from income tax on their receipts, except for unrelated business income. Gifts to “public charities”, however, are subject to a 50% limitation on deductions on gifts of cash, “ordinary income” property and a 30% limitation on “capital gain” property (discussed below); whereas private charities have a 30% limitation on gifts of cash capital property or “ordinary income property” and 20% for gifts of “capital gain” property. The deduction for any “ordinary income” property is limited to your original purchase price and not its value at time of giving. The foregoing percentages apply to your contribution base to limit how much of the gift’s value or purchase price, as relevant, you may deduct in the current year of the gift. Any excess is carried forward for five (5) years.
Public charities are those charities that either receive part of their support from the general public or distribute all of their receipts in their charitable operations each year. Examples are churches, schools, hospitals, and private operating foundations that provide direct support to the public (e.g., food banks). Private charities are all other tax exempt organizations. Examples are VFW’s and fraternal societies (see IRS publication 78).
Capital gain property is property you hold for long-term appreciation (i.e., more than one (1) year), and not property that you made yourself or that you purchased as inventory for resale. For example, artwork you purchased and held for more than a year is capital gain property. But, that same artwork in the hands of the creative artist is ordinary income property.
Furthermore, when gifting “tangible personal property” (i.e., artwork not produced by the donor) such gift must be intended to be “related to the purpose or function for which the charity is tax exempt”. For example, giving your “stamp collection” to a university intending for it be studied by students learning engraving would qualify as a gift related to the university’s tax exempt function. If, however, the collection were donated with the intention that it be sold by the university, then the value of your gift is reduced to how much you paid for the property.
The above is a very simplified glimpse into the complexities of charitable tax deductions. Donors must carefully consider all of their annual charitable deductions together because they will impact how much of each charitable gift may be deducted. Lastly, proper valuation of the gift is crucial as otherwise the deduction may be lost entirely.
Editor’s Note: Dennis A. Fordham is an attorney licensed to practice law in California and New York. He earned his BA at Columbia University, his JD at the State University of New York at Buffalo, and his LLM in Taxation at New York University. Dennis concentrates his practice in the areas of estate planning and aspects of elder law. His office is at 55 1st Street, Lakeport, California. He can be reached by e-mail at firstname.lastname@example.org or by phone at 707-263-3235.
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