9.3 Income Tax Requirements

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

9.3 Income Tax Requirements

The requirements for deductibility of gifts to public charities for income tax purposes is more detailed. The requirements are most easily understood by looking at the type of property given: (1) cash, (2) ordinary income property, (3) long-term capital gain property, (4) tangible personal property, and (5) future-interest property.

9.31 Cash and Ordinary Income Property

Prior to the Tax Cuts and Jobs Act of 2017, gifts of cash to a public charity were a deductible itemized deduction up to a maximum of 50% of the taxpayer's adjusted gross income. This cap has been increased to 60% of adjusted gross income. The text in this chapter is based on the 2017 law. Thus, the reader should note this change throughout this chapter. This act is not popular with most charities; thus, the reader is cautioned to expect additional changes in the tax laws affecting charities in the next several years. Any excess of the cash gift can be carried forward and deducted in future years for a maximum of five years.⁴Ordinary income property is property that, if sold, will give rise to ordinary income and not a capital gain. Thus, it includes such items as inventories, short-term capital gains (capital assets sold within one year of acquisition), and works of art or copyrighted materials given by the individuals who created them. Ordinary income property that is given to a public charity is subject to the same 50% of adjusted gross income and five-year carry-forward rule.⁵ The appreciation on gifts of ordinary income property, however, is not deductible because the gift is limited to the donor's basis in the property.

9.32 Long-Term Capital Gain Property

Long-term capital gain property, which includes such items as stocks, real estate, and other investment properties that have been held by the donor in excess of one year, is deductible at the fair market value of such property. Thus, the appreciation in addition to the donor's basis is included in the value of the gift for purposes of the income tax deduction. The maximum deduction, however, is limited to 30% of the donor's adjusted gross income, with the same five-year carry-forward.⁶

Example: A donor wishes to make a $10,000 gift to a favorite charity. The donor owns stock currently valued at $10,000 with a basis of $1,000. If the donor sells the stock and gives $10,000 to the charity, he or she will have a tax benefit from the itemized deduction of $2,800 offset by an income tax cost of the sale of...