Charitable Contributions and What the Annual Limitations mean to Taxpayers
The Taxpayers Cut and Jobs Act passed on December 22, 2017 has created new rules to consider when planning and determining the tax benefits of a charitable contribution. Some taxpayers may look briefly at the rules and determine there was an overall increase in charitable contribution limitation to 60% in 2018 versus 50% in prior years. However, the increased limitation only applies to certain types of charitable contributions. The new law has created a multi-tiered annual gift limitation that will require further analysis to determine the current year allowable charitable contribution deduction. The annual charitable deduction limitation can range from 20% to 60% of adjusted gross income (AGI).
Contribution of Capital Gain Property
When a taxpayer is considering whether to make a noncash contribution of capital gain property this can create another layer of complexity. In most cases, other than the dollar amount of the contribution, the taxpayer should ask themselves three important questions: how long the capital gain property was held; to what type of organization is the property being contributed; and, what type of stock is being contributed.
First determine whether the property was held for longer than a year (long-term) or less than a year (short-term). The overall charitable deduction is based on whether the cost basis of the property or fair market value is used in determining the limitation. Then, the taxpayer should consider the type of charitable organization that the property is being contributed to. Is the organization a public charity or a private foundation? The Internal Revenue Service (IRS) allows a deduction for appreciated long-term capital gain property contributions (publicly traded securities) to public charities at the maximum of 30% versus private foundations which are capped at 20% of AGI (the percentages may be less based on facts and circumstances). A private foundation usually invests a certain dollar amount in investment vehicles and distributes the income for charitable purposes. A public charity relies on support from the general public and is most commonly associated with churches, education, and healthcare groups.
The type of stock contributed to a private foundation or public charity is very important. Taxpayers can contribute assets in the form of privately held stock. However, the original cost basis of the stock may be significantly less than the fair market value of the stock. If the capital gain property is disposed of properly, the donor can avoid the long-term capital gains tax on the related stock while maximizing the contribution made to the charity. A qualified appraisal may be required if donating non- publicly traded stock that is greater than $10,000.
Cash and Short-Term Capital Gain Property Contributions
A taxpayer will be allowed an annual charitable deduction of up to 60% of AGI for gifts of cash to a public charity, except for contributions that are made “for the use of”. A contribution made “for the use of” is commonly done within a trust.
A charitable contribution of cash or short-term capital gain property contributed to a private foundation or considered “for the use of” is limited to the lesser of 30% of the taxpayer’s AGI or 50% of the AGI less 60% and 50% contributions.
Long-Term Capital Gain Property Contributions
A taxpayer who contributes long-term capital gain property to a public charity has the option to elect to deduct the lesser of the cost basis or fair market value. If the election is made, the charitable contribution would be limited in the current year to 50% of the taxpayer’s AGI less 60% contributions. However, if the election is not made, the current year contribution would be limited to 30% of AGI. Finally, a charitable deduction can be taken in the current year for gifts made to a private foundation up to 20% of AGI. The 20% limitation applies to gifts of capital gain property to non-50% charities (e.g., most family-funded private foundations). The 20% limit is applied after considering the 60%, 50% and 30% limits (if any) for the tax year.
Qualified Charitable Distribution
A qualified charitable distribution is a great planning tool that does not require an individual to itemize their deductions to receive a tax benefit. A qualified charitable distribution is an amount donated directly from a donor’s IRA account. The distribution made from a donor is not included as income on their individual tax return or as a charitable contribution deduction. A taxpayer can make a qualified charitable distribution to satisfy their required minimum distribution for the year. There are certain rules that must be followed. First, the contributions must not be made from an active Simplified Employee Pension Plan (SEP IRA). Second, contributions must be made directly to a public charity and cannot be made to a private foundation, supporting charitable organization, or donor advised fund (DAF). Third, an individual making a qualified charitable distribution must be 70 ½ at the time of distribution (this includes the beneficiary of an inherited IRA). Finally, the maximum allowable distribution amount is $100,000 annually.
Charitable Contribution Bunching and Carryover Rules
With the recent tax law changes, including the increase in standard deduction amounts and reduction in allowable state tax deduction, individuals may need to consider additional planning for charitable contributions. Individuals may want to consider grouping or “bunching” multiple years of charitable donations into one year to maximize their overall deductions and minimize their overall tax liability. Taxpayers must also be cognizant of the AGI limitation and carryover planning. A taxpayer can carryover charitable contributions up to five years that exceed the AGI limitation. The charitable contribution retains the same AGI deduction limitation in subsequent years. The ordering rules require an individual to deduct contributions made in the current year prior to considering any contribution carryover amounts. If in a subsequent year the donor claims the standard deduction rather than itemized deduction amount, a portion or the entire contribution carryover could be lost.
Article written by Christopher F. Dingman.
If you have any questions about how the contribution deduction limitations will impact you, please contact the author on the form below.