Understanding IRS Limits on Charitable Gifts
In most cases, a donation to a qualified charity is deductible as an itemized deduction in the tax year in which it is given. This applies to donations regardless of whether you give directly to the charity or contribute to a donor-advised fund or other structured giving program.
Donations can be cash (which the tax code defines as gifts made by check or credit card), real property, goods, or assets. To get the tax benefit of any charitable gifts, you must itemize your donations as deductions on Form 1040, Schedule A.
However, tax laws and regulations could limit the deductibility of charitable gifts based on several factors, including the donor's income, the type of gift made, and the type of organization to which the gift is made.
Organizations qualifying as tax-exemptThe IRS strictly regulates the tax-exempt status of charitable groups. Those that meet the agency's approval are known as qualified organizations, and only deductions to such qualified organizations are deductible.
Generally, tax-exempt organizations must file an annual information return with the Internal Revenue Service that details the group's income, expenses, and activities. There are some filing exceptions: Churches, certain religious organizations, and certain organizations affiliated with state and local governments do not need to file. Organizations with annual gross receipts of $25,000 or less were not required to file until the tax year ended on or after December 31, 2007.
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Once you determine that a group is IRS-qualified, then you must ensure that both you and the organization are able under tax laws to take full advantage of a gift.
The nature of the institution to which you contribute is the first condition that may limit your deduction. You are also limited to certain percentages of your adjusted gross income.
In most cases, your gift's deductibility is restricted to 50% of your adjusted gross income (AGI). That is, you cannot give these groups an amount that is more than half of your adjusted gross income. In some instances, stricter limits—30% and 20% of AGI—apply.
The groups for which you can get a full tax benefit for donating an amount up to half of your annual income are known as 50% limit organizations. This category includes educational organizations, hospitals and medical research organizations, government units, and churches.
Qualified organizations, gifts to which are limited to 30% of AGI, include veterans organizations, fraternal societies, and certain private family foundations. A reputable and IRS-qualified charity will be able to tell you its limitation category.
Here's an example of how the limits could affect your giving:
A single taxpayer has an adjusted gross income of approximately $60,000. He may deduct as a charitable donation to his alma mater roughly $30,000, or 50% of his AGI. He also elects to give to his chapter of the Rotary Club; since this is a 30% limit organization, he is limited to approximately $18,000 ($60,000 x 30%). He ultimately contributes $5,000 in cash to each organization and is able to take the full amounts as charitable deductions on his tax return.
Another example:
Similar situation, however the taxpayer decides to donate $10,000 to his alma mater and $20,000 to the Rotary Club. Since the deduction for the contribution to the Rotary Club is limited to $18,000, the taxpayer can only deduct that much on his tax return this year. He may then carryforward the $2,000 excess to the subsequent tax year. As an alternative, he may decide to donate $12,000 to his alma mater and $18,000 to the Rotary Club to receive the full $30,000 deduction this year.
If your contributions are subject to more than one limitation, you deduct contributions to 50% limit organizations first, followed by contributions subject to the 30% limit, and then contributions subject to the 20% limit.
The nature of the donated assets also could further limit a gift's tax deductibility.
Contributions of long-term capital gain property to 50% limit institutions are subject to a 30% of AGI limitation. (Contributions of cash and short-term capital gain property to these groups remain subject to the 50% AGI limitation. For short-term capital gain property, you can only deduct the original cost of the property, rather than its appreciated value like you can with long-term capital gain property.)
With regard to 30% institutions, contributions of long-term capital gain property are subject to a 20% of AGI limitation. (Cash and short-term capital gain property donations remain subject to the 30% limit.)
Depending on your personal tax situation, donation of a long-term appreciated asset could help significantly reduce your tax liability.
If your charitable deduction exceeds the limit allowed by the IRS in a particular year, you can claim the excess amount on subsequent tax returns, with some limitations.
First, in carrying forward your excess contributions, you must take into account your income in the year in which you want to claim the carryforward. Your total contributions deduction for the year to which you carryforward past amounts cannot exceed 50% of your adjusted gross income for that year. In addition, carryforward contributions are subject to the same percentage limits in the year to which they are carried. That means contributions subject to the 20% limit in the year they were originally made remain subject to the 20% limit in the year to which they are carried.
Also, you will want to take into account the timing of the claim. For each category of contributions, you must deduct carryover contributions only after deducting all allowable contributions in that category for the current year.
Finally, you have only five years to make use of your excess contributions. Any amount you cannot claim during that time is lost.
This example looks at how one couple claimed excess carryforward deductions:
A married couple, filing jointly, has an adjusted gross income of approximately $84,000. The couple made a contribution of appreciated securities valued at $46,200 to the local hospital for the addition of a special cancer research wing. The hospital qualifies as a 50% institution and the donated property is long-term capital gain property subject to a 30% of AGI limitation, or $25,200 (i.e., $84,000 x 30%). The couple, therefore, can deduct only $25,200 for the current calendar year and may carryforward the remaining $21,000 ($46,200 — $25,200) to the following year. If the couple's AGI drops to $60,000 in the following year, they can deduct $18,000 of the $21,000 then and carryforward the remaining $3,000 deductible amount to year three.
Any excess over the AGI limitation is carried forward to the subsequent year. If your contributions are subject to more than one limitation, you deduct contributions to 50% limit organizations first, followed by contributions to 30% limit organizations, then contributions subject to the 20% limit.
If your income exceeds a certain level, you might face another possible tax deduction restriction.
Your overall itemized deductions, including charitable contributions, may be reduced based on your AGI. The phaseout kicks in for 2008 filings when your AGI exceeds $159,950. This threshold applies both to single filers as well as to couples filing joint returns; the AGI cap for a married taxpayer filing a separate return is $79,975.
The reduction of itemized deductions is 3%. However, as part of the tax cuts passed in 2001 and adjusted since, the reduction percentage is being phased out. In 2008 and 2009, the 3% reduction of itemized deductions will be only 1%.
This example looks at how a couple might lose some 2008 itemized deductions:
A married couple filing jointly has an adjusted gross income of $250,000 in 2008. Their itemized deductions consist of $10,000 for charitable contributions and $12,000 for state income and property taxes. Because their AGI exceeds the threshold of $159,950, their total itemized deductions for the year will be reduced by 1%, or $901 ($250,000 - $159,950 = $90,050 x 1% = $901). The total amount they may deduct on their tax return is $21,099 ($22,000 in itemized deductions minus $901).
The limit on itemized deductions itself will be eliminated in 2010. However, unless Congress takes further action before then, taxpayers who make over the threshold amounts will see the limitation return in full force as a 3% reduction of up to 80% of itemized deductions, in 2011.
