Year-End Tax Planning Series: Charitable Deductions

Posted November 29th, 2010

Author: William H. Byrnes & Benjamin S. Terner                 

Why is this Topic Important to Wealth Managers? Discusses charitable contributions for individuals.  May assist wealth managers plan client contributions made to charities this year.    

Generally a deduction is allowed to “individuals, corporations and certain trusts for charitable contributions made to qualified organizations, subject to percentage limitations and substantiation requirements.” [1]

The law allows for such charitable contributions as itemized deductions, as “an incentive to encourage charitable contributions”, to certain charitable organizations[2]

Assuming all other factors equal, “it is usually better for the donor to make a charitable gift during life than at death, because the gift can generate an income tax charitable deduction for the donor.” [3]

How much is the deduction?

The charitable contribution income tax deduction for an individual taxpayer can be classified as not to exceed 50 percent or not to exceed 30 percent of the taxpayer’s adjusted gross income (AGI), depending on the donee charity. [4]

For a discussion of Adjusted Gross Income or AGI, see AdvisorFX—Deductions in Determining Adjusted Gross Income and Taxable Income.

In addition, “[a]fter application of these limits, the charitable contribution deduction is also subject to the overall phase-out of itemized deductions.” [5]

Other additional factors which may limit the deduction include, but are not limited to,

  • The amount of the donor’s contribution base, or the adjusted gross income, without regard to any net operating loss carryback to the year.
  • Whether the contributed property is ordinary income property, capital gain property, or neither;
  • Whether the property will be used to further the charity’s exempt purpose; [6]

Some of the common donees under the 50% category, include but are not limited to,

  • churches
  • educational organizations
  • organizations providing medical or hospital care or medical education or research
  • certain governmental units
  • certain private foundations [7]

The two charts presented below are adopted from “Estate Planning & Wealth Preservation: Strategies & Solutions” [8] and can be used to determine the above limitations on the deductibility of outright gifts to charities. The lowest amount deductible applies.
Type of Gift                                         Percentage of Contribution
                                                                 Base Deductible
Gift to 50 percent charity (except long-term         50 percent
  capital gain property)

Gift of long-term capital gain property to 50        30 percent, or 50 percent
  percent charity                                                              if deduction is limited to basis *

Gift to 30 percent charity (except long-term         30 percent
  capital gain property)

Gift of long-term capital gain property to 30        20 percent
  percent charity

* see below

  • Property for Which Deduction Is Limited to Basis
  • Gift to 50 percent charity, if the donor has elected to limit the deduction of long term capital gain property to basis, as a tradeoff for the 50 percent-of-contribution-base limit.
  • Property which would generate short-term capital gain or ordinary income if it were sold.
  • Gift of tangible personal property to 50 percent charity, if the charity will
      not use the property in its exempt purpose.

For additional discussion on charitable contributions see AdvisorFX—The Income Tax Charitable Deduction—I.R.C. §170

Tomorrow’s blogticle will continue to discuss relevant topics to wealth managers. 

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[1] 34 Am. Jur. 2d Federal Taxation ¶ 18950.

[2]AdvisorFX.  AUS Main Libraries, Section 19. Income Taxes, B6—The Income Tax Charitable Deduction—I.R.C. §170, Citing, 26 U.S.C. §170.  Last Accessed 11/25/2010. 

[3] Kathryn G. Henkel.  Estate Planning & Wealth Preservation: Strategies & Solutions


[4] See 26 U.S.C. 170(b)(1)(A); 26 U.S.C. 170(b)(1)(B).

[5] AdvisorFX. B6—The Income Tax Charitable Deduction—I.R.C. §170.

[6] Kathryn G. Henkel.  Estate Planning & Wealth Preservation: Strategies & Solutions

[7] 26 U.S.C. 170(b)(1)(A).

[8] Kathryn G. Henkel. P 32.02 INCOME TAX DEDUCTION FOR CHARITABLE GIFTS-GENER AL  1999 WL 1017736, 1 (W.G.&.L.).

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2 Responses to “Year-End Tax Planning Series: Charitable Deductions”

  1. Your readers may also be interested in what are called charitable remainder trusts. These trusts are used to place monies in trust for the benefit of the donor and the tax-exempt organization. Basically, the donor (and his wife if desired) can be paid an income from the trust for their lives or for a term of years. When this time frame ends the charity named as the residual beneficiary gets the balance in the trust. The advantage for the donor is that they reserve income to themselves and get a tax deduction in the year the trust is funded for the actuarial value of the residue going to charity. There are various types of charitable remainder trusts and the provisions can be fine tuned to meet various needs.
    Finally there is something called a charitable lead trust, that works in the opposite way; the charity is paid first and for a number of years and then the balance goes to family or other non-charitable remainder beneficiaries.

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