Gifts of appreciated property to charity.
In general, five different percentage limits apply to charitable deductions, all based on an individual's adjusted gross income (AGI).
The first limit is the 50% overall limit. To be currently deductible, charitable gifts taken together may not exceed 50% of a taxpayer's AGI. If donations exceed 50% of AGI in any year, the excess is carried forward as a deduction in future years. To complicate this simple concept, there are percentage limits based on the category of asset contributed as well as the type of charity to which the contribution is made.
Types of Charities
50% charities (also known as Sec. 501 (c) (3) charities). These charities are typically churches, schools, hospitals, governmental units, private operating foundations and other nonprofit agencies organized for charitable, religious, educational, scientific or literary purposes.
30% charities. These charities include veterans' organizations, domestic fraternal societies, nonprofit cemeteries and certain nonoperating private foundations.
20% charities. Typically, these charities are family-funded private foundations.
Category of Asset Contributed
Type 1. Cash and non-long-term capital gain property (basically, inventory or capital-gain-type assets held less than one year).
Type 2. Long-term capital gain property.
Second-Level Percentage Calculation
50% limit. Type 1 assets to 50% charities.
30% limit. Type 1 assets to 30% charities and type 2 assets to 50% charities.
20% limit. Type 1 assets to 20% charities and type 2 assets to 30% charities.
Because taxpayers can make donations of different asset categories to different types of charitable organizations, these limits need to be ordered:
1. Type 1 assets to 50% organizations.
2. Type 1 assets to 30% organizations.
3. Type 2 assets to 50% charities.
4. Type 1 assets to 20% charities.
5. Type 2 assets to 30% charities.
For California income tax purposes, the rules governing deductibility of appreciated asset donations are different from the Federal rules. When Congress first allowed taxpayers to deduct the FMV of appreciated property, the portion of the deduction associated with the untaxed gain was made subject to the alternative minimum tax (AMT). For Federal purposes, this rather onerous limitation has been eliminated. However, California never conformed to this Federal change; thus, the untaxed gain portion is still subject to California AMT.
Another nonconformity occurs when dealing with appreciated property donated to private foundations. The Service allows a deduction for the FMV of the asset subject to the 20% limit. For California purposes, the deduction is limited to the basis of the asset contributed.
Example: A married couple with AGI of $333,250 is considering donating $100,000 to the Boys and Girls Club, a 50% charity. The couple's only other itemized deductions are $22,000 in state income taxes, a contribution of $5,000 to a veterans' organization and $2,500 to various local charities. The $100,000 will come from the sale of stock with a zero tax basis. The couple can either contribute the stock to charity or sell it and contribute the cash.
If the stock is contributed rather than sold, the couple's Federal tax liability is reduced by $19,271. The amount of contribution allowed is $102,475, with $5,025 carried over to the following year. The $102,475 contribution is calculated as follows. The overall limit of 50% of AGI is $166,625. However, the contribution to the veterans' organization is limited to 30% of AGI, or $99,975. The gift of appreciated stock to the Boys and Girls Club is also limited to 30% of AGI. Therefore, of the $105,000 given subject to the 30% limit, only $99,975 may be used in the current year. The $2,500 cash can be fully deducted this year. Thus, the current-year deduction is $102,475.
FROM ROBERT T. BURSON, CPA, GRICE, LUND & TARKINGTON LLP, CPAs, ENCINITAS/ESCONDIDO, CA
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|Author:||Burson, Robert T.|
|Publication:||The Tax Adviser|
|Date:||Dec 1, 1999|
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