Chapter 16 - § 16.4 • PERCENTAGE LIMITATIONS

• Jurisdiction: Colorado

§ 16.4 • PERCENTAGE LIMITATIONS

Under certain circumstances, contributions to charity may be deducted in full. Trusts, for example, are allowed an income tax deduction for distributions to charity in an amount up to 100 percent of their taxable income, I.R.C. § 642(c), and the federal estate and gift tax provisions state that up to 100 percent of a bequest or lifetime gift passing to charity may be deductible. I.R.C. § 2055 (estate tax); I.R.C. § 2522 (gift tax). See § 16.6.2 for more information about gifts to charitable trusts.

In the case of charitable contributions by individuals and corporations, however, there are limits on the amount that taxpayers can deduct for federal income tax purposes in any particular year. The present discussion concerns what are known as the "percentage limitations." These are limits on the amount of a taxpayer's income in any particular year that may be sheltered by the federal income tax charitable deduction. These rules are different from, and supplemented by, other rules (discussed later) that limit the portion of the value of property that may be claimed as a charitable deduction.

The average individual is unlikely to encounter these percentage limitations, since it is somewhat rare for an individual to contribute an amount that exceeds a sizeable percentage of that person's income for any particular year. On the other hand, if an individual's income consists largely of tax-exempt income, or if the individual has extraordinary "above the line" expenses in any year or makes an unusually large, one-time gift, then the percentage limitations may come into play.

§ 16.4.1—Contributions to 50 (or 60) Percent Charities

In the case of contributions to what have historicaly been referred to as "50 percent charities," individuals have been entitled to claim a deduction of up to 50 percent of adjusted gross income each year. I.R.C. § 170(b)(1)(G), added by § 11023 of the Tax Cuts and Jobs Act, temporarily increases the applicable limit to 60 percent, with respect to contributions made in taxable years ending after December 31, 2017 and before January 1, 2026. (In either case, the applicable measure is actually the taxpayer's "contribution base," defined as adjusted gross income without regard to any net operating loss carryback.) I.R.C. § 170(b)(1)(F). Any excess may be permitted as a deduction in succeeding years under the carryover rules discussed below.

For these purposes, what this chapter refers to as "50/60 percent charities" are defined in I.R.C. § 170(b)(1)(A) and are limited to the following:

1) Churches;¹
2) Schools (defined in Treas. Reg. § 1.170A-9(c)(1));
3) Hospitals and certain medical research organizations (defined in Treas. Reg. § 1.170A-9(d));
4) Foundations for the benefit of public colleges and universities (defined in Treas. Reg. § 1.170A-9(c)(2));
5) Governmental units described in I.R.C. § 170(c)(1);
6) Certain "publicly supported organizations" described in I.R.C. § 170(b)(1)(A)(vi) (see Treas. Reg. § 1.170A-9(f));
7) "Special case" private foundations described in I.R.C. § 170(b)(1)(E):

a) Private operating foundations described in I.R.C. § 4942(j)(3);
b) "Pass through" foundations — that is, private foundations that distribute 100 percent of the contributions they receive by March 15 of the following year; or

c) Private foundations that accept contributions into a pool from which the donor or the donor's spouse may designate the recipients (which must be § 509(a)(1) public charities) of the income and corpus from the donor's share of the fund, so long as all income is distributed annually not later than March 15 of the year following the year in which it is earned and all corpus is distributed no later than one year after the death of the donor (or, in certain cases, the death of the donor's spouse);

8) "Public charities" described in I.R.C. §§ 509(a)(2) and (3) (see Treas. Reg. §§ 1.509(a)-3 and 1.509(a)-4); and
9) Certain agricultural research organizations as described in I.R.C. § 170(b)(1) (A)(ix).

Treasury Regulation § 1.170A-8(a)(2) distinguishes between contributions "to" a § 170(b)(1)(A) charity (generally a direct contribution), and contributions "for the use of" a § 170(b)(1)(A) charity (generally a contribution in trust). Only the former are eligible for the 50 percent (now, temporarily, 60 percent) limitation, while the latter, even if made to a so-called "50/60 percent charity," are limited to 30 percent of the taxpayer's adjusted gross income. For example, the regulation explains, if a donor establishes a charitable remainder trust that will continue in existence for the benefit of the charitable remaindermen after the expiration of the private life estates, then a contribution to such a trust will not be considered a contribution "to" a § 170(b)(1)(A) charity, since it will continue to be held in trust for the benefit of the charitable remaindermen.

§ 16.4.2—Contributions to 30 Percent Donees

In the case of a contribution to any other type of charitable organization, or to any war veterans' organization, fraternal lodge, or cemetery company, an individual's deduction will be limited to 30 percent of the individual's adjusted gross income in any year.

§ 16.4.3—Contributions of Capital Gain Property to 50 (or 60) Percent Charities

I.R.C. §...