General Tax Benefits of Charitably Giving

Warren Buffet released certain claims made on his 2015 personal income tax return in a statement released by Business Wire, A Berkshire Hathaway Company. It is worth noting his remarkable generosity. Check out these figures:

  • adjusted gross income - $11,563,931 - MILLION
  • Itemized deductions - $5,477,694 - MILLION
  • Total charitable contributions - $2,858,057,970 - BILLION
  • Allowable charitable contributions for income tax purposes via IRS Form 1040 Schedule A - $3,469,179 - MILLION
  • Charitable contributions not taken as deductions and never will be - $2,854,588,791 - BILLION

Why could he not claim more charitable contributions on his tax return?  Tax law limits charitable deductions.

Stay with me here as it can get a little back talky:

However the income tax deduction individual taxpayers can claim is limited:

  • Generally, you cannot receive a charitable deduction for greater than 50 percent of their adjusted gross income (AGI) and in certain instances this threshold is lower
  • Percentage limitation is lower for property with built-in long term capital gain and for contributions to “private charities”
  • Contributions to “Public Charities” - You can elect to have 50% of AGI limit apply if amount of deduction is limited to basis
  • Limitation of 50% of AGI for appreciated property (instead of the normal 30% limit)
  • Limitation of 100% (i.e. limited to AGI) for Farmers & Ranchers (i.e. those who receive more than 50% of their income from farming or ranching)
  • Contributions in excess of the Percentage Limitation can be carried forward for 5 years (6 tax returns)

Itemized deductions are limited as income rises above the following threshold amounts in 2016

  • Single taxpayers: $259,400
  • Head of households: $285,350
  • Married filing jointly: $311,300
  • Married filing separately: $155,650
  • Amounts are indexed for inflation •

Phase outs cut itemized deductions by 3% of AGI above the threshold amounts up to a maximum of 80%.  However you can still make gobbles of $$ and still itemize your deduction on IRS Form 1040 Schedule A. Check out Hillary Clinton's 2015 tax return to see how her and Bill did it.

Donating appreciated property, rather than cash can produce a better tax result.  Things to consider:

  • The need to liquidate assets to generate cash flow for donation
  • Character of the appreciation on the property (i.e. long-term capital gain vs. short-term capital gain vs. ordinary income) to be gifted to charity
  • Unrealized built-in-gain typically not recognized as income when the property is donated, but remains deductible
  • Gifts must be made from the gross income of the trust or estate to qualify for the income tax deduction
  • Very problematic for gifts to charity that will be fulfilled with items of IRD
  • Eligible charities are the same as provided for in §170
  • However, the gifts are not subject to the percentage limitations of §170
  • Another important difference is that, unlike charitable deductions by individuals, they can be made to foreign as well as domestic charities

I instruct that all of my charitable gifts shall be made, to the extent possible, from amounts included in gross income and shall qualify for a charitable income tax deduction under Section 642(c)

John R. Dundon, EA [720-234-1177, John@JohnRDundon.com] Enrolled with the United States Department of Treasury to Practice before the IRS (Enrolled Agent # 85353). Under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent. A Federally Authorized Tax Practitioner (USC 31 Section 330 + IRC 7525a.3.A) regulated under US Treasury Cir. 230.

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