Charitable contributions not only entitle the donor to an income-tax deduction, but may also accomplish certain estate-planning objectives. Such contributions can be made as outright gifts or as gifts to trusts. The benefit to the charity or charities provides the primary motivation for most charitable giving, but significant estate planning benefits may also encourage people with larger estates to make charitable gifts. In some situations, people who may not otherwise be inclined to provide for charities find that charitable giving can reduce taxes and facilitate their overall estate-planning objectives.
Qualified Charities. For the purposes of this memo, all references to “charities” are references to “qualified charities” as defined under the Internal Revenue Code. IRS Publication 78, “Cumulative List of Organizations described in Section 170(c)” is a list of organizations that the IRS has ruled are qualified charities.1 Under section 170 of the Internal Revenue Code, a qualified charity fits into one of five categories:2
(a) A corporation, trust, community chest, fund, or foundation organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to animals, or to foster and conduct amateur sports competition;
(b) A governmental entity;
(c) A war veteran’s organization;
(d) A domestic fraternal society, order, or association; or
(e) A nonprofit cemetery company chartered solely for burial purposes.
Deduction Ceilings. The charitable deduction for income tax purposes is limited.
(a) Most public charities are classified as “50% charities”, and individuals may deduct charitable contributions to the extent they do not exceed 50% of their adjusted gross income.
(b) Certain organizations (such as war veterans’ organizations, fraternal orders, and nonoperating private foundations) are classified as “30% charities”, and the charitable deduction is limited to 30% of the individual’s adjusted gross income.
(c) For gifts of appreciated assets (long-term capital gain property), the limitations are normally reduced to 30% (for “50% charities”) and 20% (for “30% charities”), but at the time this memo was prepared, Congress had enacted a temporary law modifying this rule.3
(d) If a charitable contribution exceeds the deduction limitation, the unused portion can be used in up to five subsequent years, but even this depends on the type of property being contributed and the class of charity to which the contribution is made.
Cash Donations. Cash donations to a qualified charity are the simplest way of making a charitable gift. If the charity is a qualified charity, the donation qualifies for a current income tax deduction, subject to contribution limitations determined by the type of charity.
(a) If the contribution is made in conjunction with an event (such as a dinner or entertainment), the deduction is limited to the difference between the amount contributed and the value of the benefit received.
(b) Amounts paid for raffle tickets and bingo games are not charitable contributions (but they may be deductible as gambling losses that can offset gambling winnings).
Gifts of Property. Gifts of property are also deductible, but the rules that apply to contributions of property are more complex than those that apply to cash.
(a) As a rule, the deduction amount is the net fair market value of the property contributed as of the time of the contribution, and no gain must be reported if the property has appreciated.
(b) If a sale of the contributed property would have produced ordinary income (such as property held in a business inventory), the deduction is reduced, but the amount of reduction depends on certain factors, including the type of property contributed and the charitable organization receiving the contribution.
(c) The deduction for contributions of tangible personal property unrelated to the charity’s “exempt function” or to certain private foundations is limited to the donor’s basis.
(d) A “bargain sale” is a sale of an asset to a charity for less than its full fair market value, which can result in a partial deduction. A bargain sale of appreciated assets will also result in some taxable gain.
(e) The cash value of life insurance contributed to a charity and premium payments on a charity-owned policy can be deductible if certain requirements are met. The charity must be irrevocably designated as the beneficiary, and the donor cannot retain any control or benefit from the policy.
Partial Interests. Generally, a charitable deduction is not available unless the donor gives away his or her full interest in the property given. This is why there is no deduction for allowing a charity to use an asset. Some of the exceptions for charitable trust interests and nontrust interests are discussed below.
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