Limits on individuals' charitable deductions.

• Author: Swift, Kent
• Position: Part 2

EXECUTIVE SUMMARY

* When a donor makes contributions subject to multiple AGI percentage limits, limits and carryovers must be computed and applied in a specific order.

* Taxpayers who consistently make large contributions should consider planned-giving techniques.

* Numerous rules restrict or affect the charitable deduction, including rules on valuation, contribution of services, receipt of benefits and the itemized deduction phaseout.

This two-part article outlines the deduction limits on individuals' charitable contributions and provides basic planning strategies for maximizing the deduction. Part II reviews rules for deductions subject to multiple adjusted gross income percentage limits, planned-giving techniques, valuation requirements, restrictions on donated services and receipt of benefits.

A solid understanding of the limits on charitable deductions helps tax advisers plan strategies for charitable giving. This two-part article discusses the limits, as well as compliance and planning strategies. Part I, in the May 2004 issue, focused on the adjusted gross income (AGI) percentage limits and restrictions, which vary according to the classification of the donee organization and the donated property. Part II, below, reviews the ordering rules for contributions subject to multiple limits; planned-giving techniques for taxpayers who make large contributions; donation valuation requirements; contributions of services; and benefits received.

Hierarchy of Limits

When a donor makes charitable contributions subject to different percentage limits in the same year, calculating the deduction can become confusing, but should be relatively straightforward in most situations. The rules are provided in Sec. 170(b)(1)(B)(ii), (b)(1)(C)(ii), (b)(1)(D)(ii) and (d). First, the donor's total charitable deduction for the current year cannot exceed 50% of AGI. This may place added restrictions on contributions subject to the 30%-of-AGI limit.

Example 1: P's 2004 AGI is $135,000. During the year, he contributes $45,000 to a 50% public charity. He also contributes appreciated securities valued at $30,000 and held for more than a year in another 50% public charity.

P can deduct the entire $45,000 cash contribution, because it does not exceed 50% of his AGI ($135,000 x 50% = $67,500). Although the value of the contributed securities does not exceed 30% of P's AGI ($135,000 x 30% = $40,500), P can only deduct $22,500 in the current year for that donation, because his overall charitable deduction for the current year cannot exceed 50% of his $135,000 AGI. The $45,000 50% contribution limit applies first, which allows only $22,500 of the securities donation currently. The $7,500 unused securities donation is carried forward.

A similar rule is used for calculating the limit on 20% property. A donor's aggregate charitable deduction for 30% property and 20% property cannot exceed 30% of AGI. Deductions for 30% property are taken before deductions for 20% property.

As mentioned above, unused donations are carried forward five years. In carryover years, current contributions are deducted first. This can make it more difficult to use carryovers.

Example 2: C has a $170,000 AGI. In 2004, she makes a $95,000 cash gift to a public charity, which exceeds 50% of her AGI. C also has a $17,000 unused contribution carryforward from 2003.

C can only deduct $85,000 of her current-year charitable contribution, because of the 50%-of-AGI limit. She must now carry forward $17,000 from 2003 and $10,000 from 2004 to 2005, in the hope of using them in that year or later. None of the 2003...