Bryant - Course 4. Tax Planning. 11. Charitable Contributions and Deductions

Question 1

Define qualified organization

Answer 1

To deduct a contribution for federal income tax purposes, a taxpayer must make the contribution to or for the use of a qualified organization. The Supreme Court has ruled that in order for a contribution to be for the use of a qualifying organization, the gift must be held either in a legally enforceable trust or in a similar legal arrangement. Contributions made to individuals, though they may be in need, are generally not eligible for deductions.

The qualified organizations under Section 170 are:
* The United States, the District of Columbia, a state or possession of the United States, or a political subdivision of a state or possession
* A corporation, trust, community chest, fund, or foundation created or organized under the laws of the United States, a state, possession, or the District of Columbia
* A post or organization of war veterans
* A domestic fraternal society, order, or association
* Certain cemetery companies

Each type of organization has different restrictions and limitations. So these qualifying organizations are further classified into public charities and private nonoperating foundations.

Question 2

Actual Cost of Donation Example:

Assume Paul is in the 24 percent tax bracket. He gives $1,000 to a charitable organization. It actually costs him $760, because he has given away $1,000 and, as a result, lowered his taxes by $240 (0.24 x $1,000).

Answer 2

Charitable gifts made to qualified organizations qualify as tax deductions. If there is a single gift of more than $250, a receipt must be shown for the gift. A canceled check is not sufficient proof in this case. Accurate records must be maintained regardless of the size of the gift. By taking a tax deduction, the taxpayer’s actual cost of a gift is less than the gift itself.

Question 3

Erica makes a $1,000 contribution to her favorite charity, the Susan G. Komen Foundation. How can Erica show proof of her contribution for tax deduction purposes?
* She can provide a self-written letter stating her contribution.
* She can use a copy of the check submitted to the Foundation.
* She can provide a receipt as proof of the contribution.
* She does not need to show proof because the amount was under $2,500.

Answer 3

She can provide a receipt as proof of the contribution.

If there is a single gift of more than $250, a receipt must be shown for the gift. Accurate records must be maintained regardless of the size of the gift.

Question 4

Explain Application of Carryovers

Answer 4

Any contributions that exceed the deductible gift limitations may be carried over and deducted in the subsequent five years. These carryovers are subject to the limitations that apply in subsequent years. Thus, carryovers may be deducted only to the extent that the limitation of the subsequent year exceeds the contributions made during that year.

These general rules also apply with regard to special limitations. For example, if property subject to the 30% limitation is donated during the current year and the amount of the contribution exceeds the limitation, the excess may be carried over to the five subsequent years subject to the 30% limitation in the carryover years.

If a taxpayer has contribution carryovers that are about to expire, the taxpayer should consider reducing the current year’s contribution so that the carryovers can be deducted.

A deduction for carryover contributions may be taken to the extent that the 30% limitation (or 50%, 60%, or another applicable limitation is applied to the original contribution) of the subsequent year exceeds the amount of the property donated during the subsequent year, which was subject to the same percentage limitation. The carryovers are used in chronological order.

Question 5

Charitable Contribution Carryover Example:

Assume that for the years 2021 through 2023, Joan reports AGI and makes charitable contributions in the following amounts:

Year 2021, Year 2022, Year 2023

AGI $40,000 $40,000 $55,000
Cash contributions subject to the 60% of AGI limitation $25,000 $27,000 $30,000
60% of AGI limitation $24,000 $24,000 $33,000

Answer 5

The amount of the charitable contribution deduction for each year and the order in which the deduction and carryovers are used are as follows:
Year 2021, Year 2022, Year 2023
Deduction $24,000 $24,000 $33,000
Carryover From 2021 $1,000 $1,000 $0 ($1,000 of carryover is used in 2021 because Joan’s 60% limitation, $24,000, is less than her current year 60% contributions, $25,000.)
From 2023 $3,000 $1,000 ($2,000 of the $3,000 carryover from the year 2022 is needed to reach Joan’s 60% limitation. A $1,000 carryover remains to be carried into 2023.)

Question 6

What is a charitable trust?

Answer 6

A charitable trust is created for charitable purposes while also providing a benefit to the contributor. It is not essential for a charitable trust to have definite beneficiaries, and a charitable trust may exist for an indefinite period of time. The charitable trusts that we will study are vehicles for taxpayers to make gifts to charities while retaining an economic interest in the assets of the trust. There are very specific rules for these “split-interest trusts”.

Question 7

What are the three types of charitable trusts?

Answer 7

There are three types of charitable trusts:
* charitable remainder trusts,
* charitable annuity trusts, and
* pooled income funds.

Question 8

What is a pooled income fund?

Answer 8

A pooled income fund is a trust that is generally created and maintained by a public charity rather than a private donor. Charitable remainder trusts and charitable annuity trusts are set up by the taxpayer and usually maintained by a private trustee of the taxpayer’s choosing.

Question 9

What is a Charitable Remainder Trust?

Answer 9

If noncharitable beneficiaries receive annuity or unitrust payments for a specified period, such as for 10 years or for life, and afterward the charity receives the remaining corpus, the trust is called a charitable remainder trust. In this case, the charity receives the remaining interest. There is a variation on this method where the charity receives current payments for a period of time and the remainder is paid to a noncharitable beneficiary. This is called a charitable remainder lead trust.

Question 10

List and describe the three types of Charitable Remainder Trusts

Answer 10

The three types of Charitable Remainder Trusts are:
* Charitable Remainder Annuity Trust (CRAT): A charitable remainder annuity trust is a trust designed to permit payment of a fixed amount annually to a noncharitable beneficiary with the remainder going to charity.
* Charitable Remainder Unitrust (CRUT): A charitable remainder unitrust is designed to permit payment of a periodic sum, usually expressed as a percentage of the assets of the trust, to a noncharitable beneficiary, with the remainder going to charity.
* Charitable Lead Trust (CLT): A charitable lead trust is essentially the reverse of a charitable remainder trust: the charity receives the annual payment and the noncharitable beneficiary receives the remainder interest. It is an income tax device that helps the taxpayer to reduce the tax burden of an unusually high-income year. If certain requirements are met, the taxpayer will be allowed a current deduction for the value of the annuity or unitrust interest given to a charity in trust with the remainder going to a noncharitable beneficiary or to the donor.

Question 11

Permits fixed payment amount annually to a noncharitable beneficiary with the remainder going to charity.

Answer 11

Charitable Remainder Annuity Trust (CRAT)

Question 12

Permits payment of a periodic sum to a noncharitable beneficiary with a remainder to charity.

Answer 12

Charitable Remainder Unitrust (CRUT)

Question 13

Permits the taxpayer a deduction for the value of the annuity or unitrust interest given to a charity in a trust; remainder goes to the donor or beneficiary.

Answer 13

Charitable Lead Trust (CLT)

Question 14

Describe a Charitable Remainder Annuity Trust (CRAT)

Answer 14

A Charitable Remainder Annuity Trust (CRAT) is a trust designed to permit payment of a fixed amount annually to a noncharitable beneficiary with the remainder going to charity.

Using a basic charitable remainder annuity trust, the donor transfers money or securities to a trust that pays him a fixed dollar amount each year for life (or for a period of up to twenty years), in the following ways:
* If the income of the trust is insufficient to meet the required annual payment, the difference is paid from capital gains or principal.
* If the income is greater than the amount required in any given year, the excess income is reinvested in the trust.

The income tax deduction is computed in the year funds are irrevocably placed in trust and is measured by the present value of the charity’s right to receive the trust assets upon the death of the income beneficiary or at the end of the term of years.

Question 15

How do Charitable Remainder Unitrusts (CRUTs) work?

Answer 15

Charitable Remainder Unitrusts (CRUTs) work similarly to the annuity trust except that the calculation of the payment to the noncharitable beneficiary is not a fixed amount but a percentage of the principal.

Question 16

What is a Pooled Income Fund (PIF)?

Answer 16

A Pooled Income Fund (PIF) is a charitable gifting vehicle that allows money to be set aside for charity. The grantor receives a variable payment each year. It avoids capital gains taxes on appreciated securities and allows the donor to take a partial tax deduction and generate lifetime income for as many as two beneficiaries.

PIFs are invested in both fixed income and equity mutual funds, with a focus on producing income while increasing the principal value of the account over time.

Question 17

What is the main tax advantage of a PIF?

Answer 17

The main tax advantage of a PIF is that the donor will be able to deduct a portion of the PIF account contribution, depending on an actuarial calculation of the income beneficiaries’ lifetime interests, and if long-term appreciated securities are donated, the donor avoids paying capital gains tax on them.

Question 18

IRC Section 170(e) provides an increased charitable contribution deduction for certain corporate property contributions. The increased deduction is available for:

Answer 18

• property used to care for the ill, needy, or infants
• scientific research property used by colleges or universities for research and experimentation, and
• computer technology, software, and peripherals donated to educational institutions for use in grades Kindergarten through 12.

Question 19

How are Contributions by Business Entities calculated?

Answer 19

In each case, the amount of the deduction equals the donor’s adjusted basis for the property plus one-half of the excess of the property’s fair market value (FMV) over its adjusted basis. The deduction must not exceed twice the property’s adjusted basis.

Under general contribution rules, payment must be made before a contribution deduction is allowed. However, corporations using the accrual method of accounting may accrue a contribution deduction in the year preceding payment if the board of directors authorizes the payment before the end of the tax year and the contribution is made within 2½ months of the end of the tax year.

Question 20

What are the special rules for contributions made by corporations?

Answer 20

The rules are categorized as:
* Pledges made by an accrual method corporation
* Limitations applicable to corporations

Question 21

Describe the special rule made by an accrual method corporation

Answer 21

Generally, taxpayers may only deduct actual contributions (but not pledges) made during the tax year. This rule applies to both cash and accrual method taxpayers. A major exception to this general rule exists for accrual method corporations. Such corporations may elect to claim a charitable deduction for the year in which a pledge is made as long as the actual contribution is made by the fifteenth day of the third month following the close of the year in which the pledge is made.

Question 22

Accrual Method Corporation Example:

An accrual method corporation that attempted to treat a contribution paid within 2½ months following year-end as a contribution in the earlier year had its contribution deduction denied because no written declaration of the resolution of the board of directors authorizing the contribution was attached to the return.

Answer 22

Many owners of closely held corporations prefer to make charitable donations through their controlled corporation rather than as individuals because the corporation can deduct the contributions. Otherwise, to fund the contributed amounts, the controlled corporation may have to make nondeductible dividend payments to the shareholders. Also, an accrual method corporation may accelerate a charitable contribution deduction if the board of directors approves the contribution before year-end, and the corporation pays the pledge within 2½ months of the corporation’s tax year-end.

Question 23

Bucko Corporation is an accrual method corporation that makes a contribution to the Fireman’s Charity on March 29, 2023. Can Bucko Corporation claim the deduction in 2022?
* Yes
* No

Answer 23

No

Accrual method corporations may elect to claim a charitable deduction for the year in which a pledge is made as long as the actual contribution is made between the fifteenth day of the third month following the close of the year in which the pledge is made. March 29th falls after that date.

Question 24

Corporate charitable deductions are limited to __ ____??____ __ of the corporation’s taxable income for the year.

Answer 24

25%

Corporate charitable deductions are limited to 25% of the corporation’s taxable income for the year. This amount is computed without regard to the dividends-received deduction, net operating loss or capital loss carrybacks, or any deduction for the charitable contribution itself. Excess contributions may be carried forward for five years and are deductible only if the current-year contributions are less than the current year’s 25% limitation. The carryovers are used in chronological order.

Question 25

Corporate Charitable Donation Limits Example:

IN 2023, MESA CORPORATION REPORTS THE FOLLOWING RESULTS:
Description Amount
Taxable income (before deducting the dividends received & charitable contributions) $130,000
Dividends-received deduction $10,000
Charitable contributions $40,000

Mesa has never incurred a net operating loss (NOL).
* What is the limitation on contributions?
* What is the taxable income?
* How much unused contributions carries forward indefinitely?

Assume that the same facts from the example above for 2023 also apply to 2024, except that taxable income (before deducting the dividends-received deduction and charitable contributions) is $175,000.
* What is the limitation on contributions?
* How much carryover from 2023 can be used for 2024?
* How much unused contributions carries forward indefinitely?

Answer 25

The limitation on contributions is $32,500 ($130,000 x 0.25).
The taxable income is $87,500 ($130,000 - $32,500 - $10,000).
The $7,500 ($40,000 - $32,500) of unused contributions carries forward indefinitely.

The contribution limitation therefore is $43,750 ($175,000 x 0.25).
The $40,000 charitable contribution for 2024 initially applies against the $43,750 limitation, leaving a $3,750 unused charitable contribution limitation.
Thus, $3,750 of the carryover from 2023 is used against this limitation, leaving a $3,750 carryover from 2024, which can be used indefinitely into the future until depleted.

Question 26

ZZZ Company has taxable income of $300,000 before deducting the dividends-received deduction and charitable contributions. What is their limitation on charitable contributions?
* $30,000
* $150,000
* $3,000
* $75,000

Answer 26

$75,000

Corporate charitable contributions are limited to 25% of taxable income. The taxable income is computed without regard to the charitable contribution deduction, net operating loss, and capital loss carrybacks, or the dividend-received deduction.

For ZZZ Company, the limitation on charitable contributions is computed as follows:
$300,000 x 0.25 = $75,000

Question 27

Jake, a lawyer, is in a meeting with his friend Alex, a financial planner. Jake needs to make an investment and wants to save taxes. He likes the suggestion made by Alex to contribute to charities. He feels that by doing so he will be lending a helping hand for a social cause. He is thinking of contributing to a private, non-operation foundation, the Second Childhood Home for the Aged. If his adjusted gross income is $40,000, how much of a deduction can he take for his cash contributions to the Second Childhood Home for the Aged in the current tax year?
* $12,000
* $15,000
* $18,000
* $10,000

Answer 27

$12,000

Jake can contribute $12,000 to any private charity. The Federal law limits deductions for charitable contributions to private foundations to 30% of the taxpayer’s adjusted gross income.

Question 28

Finmart is a corporation that would like to donate to the World Health Organization to save on taxes. Which options are true for corporate charitable deductions? (Select all that apply)
* Corporate charitable deductions are limited to 25% of the corporation’s taxable income for the year.
* The charitable deduction amount is determined by considering the divided received deduction and net operating loss.
* Excess contributions can be carried forward for five years.
* Carryovers are generally used in chronological order.

Answer 28

Corporate charitable deductions are limited to 25% of the corporation’s taxable income for the year.
Excess contributions can be carried forward for five years.
Carryovers are generally used in chronological order.

Corporate charitable deductions are limited to 25% of the corporation’s taxable income for the year. This amount is estimated without regard to the dividends received deduction, net operating loss or capital loss carrybacks. Excess contributions can be carried forward for five years and the carryover is generally used in a chronological order.

Question 29

Robert wishes to avail tax deductions based on charitable contributions. If his contributions exceed the 50% limitation, over what time frame can he carry them forward and deduct them?
* Three years
* Four years
* Five years
* Six years
* Seven years

Answer 29

Five years

Contributions that exceed the 50% limitation may be carried over and deducted in the subsequent five years.

Question 30

Optima is a newly created charity that deals with drug abuse problems in society. In order to qualify as a charitable organization it must fulfill certain conditions. From the following statements choose the conditions that are NOT essential to charitable organizations. (Select all that apply)
* It must work for social benefits.
* It must have definite beneficiaries.
* A charitable organization may exist for an indefinite period of time.
* It must make profit and eventually generate revenue.

Answer 30

It must have definite beneficiaries.
It must make profit and eventually generate revenue.

A charitable organization is created for charity purpose and provides social benefits. It is not essential for a charitable organization to have definite beneficiaries. A charitable organization may exist for an indefinite period of time. A charitable organization may not necessarily make profits and generate revenue.

Question 31

For individuals, the general limitation applicable to public charities is __ ____??____ __% of the taxpayer’s AGI for the year.

Answer 31

The charitable contribution deduction available for any tax year is subject to certain limitations.

For individuals, the general limitation applicable to public charities is 50% of the taxpayer’s AGI for the year. Any contributions in excess of the overall limitation may be carried forward and deducted in the subsequent five tax years.

In addition, the tax law imposes further limitations on contributions of capital gain property to either a public charity or a private non-operating foundation and all types of property contributions to private non-operating foundations

Question 32

Cash contributions to public charities have a __ ____??____ __% of AGI limitation

Answer 32

Cash contributions to public charities have a 60% of AGI limitation. This threshold applies in the 2023 tax year.

Question 33

When does a 30% of AGI limitation rule apply?

Answer 33

Contributions of capital gain property to public charities are generally valued at the property’s FMV but are subject to an overall limit of 30% of AGI instead of a 50% limit.

This limit does not apply under the following situations:
* Capital gain property that is tangible personal property and is donated to a public charity. If the property is not put to its related use, the amount of the contribution is reduced to the lesser of the FMV or the basis.
* If the taxpayer elects to reduce the amount of the charitable contribution deduction by the capital gain amount, the 50% limitation is used.

The overall deduction limitation of 30% of AGI also applies to the contribution of all types of property other than capital gain property, such as cash and ordinary income property donated to a private nonoperating foundation. However, the deductibility of certain contributions to this type of charity may be subject to even further restrictions.

Question 34

Donation of Use-Related Property Example:

Joy donates a painting to the local university during a year in which she has an AGI of $50,000. The painting, which cost $10,000 several years before, is valued at $30,000 at the time of the gift. The university exhibits the painting in its art gallery. As the painting is put to a use related to the university’s purpose,
* What is the amount of Joy’s contribution?
* What is the amount of Joy’s charitable deduction for the year?

Answer 34

The amount of Joy’s contribution is $30,000.

The amount of Joy’s charitable deduction for the year, however, is limited to $15,000 (0.30 x $50,000 AGI) unless she elects to reduce the value of the contribution by the long-term capital gain.

Question 35

Contributions of capital gain property to private non-operating foundations are limited to the lesser of __ ____??____ __% of the taxpayer’s AGI or __ ____??____ __% of the taxpayer’s AGI, reduced by any contributions of capital gain property donated to a public charity.

Answer 35

Contributions of capital gain property to private non-operating foundations are limited to the lesser of 20% of the taxpayer’s AGI or 30% of the taxpayer’s AGI, reduced by any contributions of capital gain property donated to a public charity.

Question 36

Private Non-Operating Foundations (Property Type) Examples:

Stock held for less than one year is considered ‘Ordinary Income Property’ and the amount of the donation is the ‘Lower of the FMV or Adjusted Basis.’ The deductible amount is limited to 30% of the taxpayer’s AGI.

Stock held for greater than one year is considered ‘Capital Gain Property,’ and the amount of the donation is the ‘Lower of the FMV or Adjusted Basis.’ The deductible amount is limited to the lesser of 20% AGI or excess of 30% AGI over contributions to public charities.

Question 37

Practitioner Advice:

One instance where the taxpayer can make a charitable contribution to a ‘Non-50% Limit Organization’ (i.e., private foundation) and make a deduction up to 50% of AGI is a special circumstance involving Private Pass-Through Foundations.

Answer 37

If the private foundation meets a set of specific criteria and is considered a private pass-through organization, the 50% of AGI deduction would be available and the taxpayer would have to elect the ‘Lower of the FMV or Adjusted Basis.’

Question 38

How do you apply the Deduction Limitations?

Answer 38

Cash contributions subject only to the 60% of AGI limitation are accounted for before the contributions subject to the 30% of AGI limitation.

Question 39

Deduction Limits Example:

During a year when Ted’s AGI is $70,000, he donates $22,000 to his church and $23,000 to a private nonoperating charity. The church contribution is initially subject to the 60% limitation and is fully deductible because the $22,000 contribution is less than the limitation amount of $42,000 (0.60 x $70,000).

Ted’s deduction for the contribution to the private nonoperating charity (a 30% charity) is limited to $20,000 (The lesser of the three amounts):

Answer 39

Ted’s deduction for the contribution to the private nonoperating charity (a 30% charity) is limited to $20,000 (The lesser of the three amounts):

Description Amount in Dollars
* The actual contribution $23,000
* The remaining 60% limitation after the contribution to Ted’s church [(0.60 * $70,000) - $22,000] $20,000
* 30% of AGI (0.30 x $70,000) $21,000

Question 40

Calculation of Charitable Contributions Example:

During the current year, Peter Smith reports an AGI of $100,000. Mr. Smith also makes the following charitable contributions during the year:
* Performs voluntary dental work three days each month in rural areas of the state. Smith drives a total of 4,000 miles on these trips during the year.
* Makes the following contributions by cash or check: $750 to the city library, $2,000 to the United Way, $500 to a local community college, and $4,000 to his church.
* Contributes a tract of land to a small rural town. The town plans to erect a public library on the site. Smith purchased the land in 1986 for $5,000. Its appraised value at the time of the contribution is $8,000.

Peter Smith’s total charitable contributions for the year will be the following:

Answer 40

Peter Smith’s total charitable contributions for the year will be the following:
* Miles (4,000@$0.14 cents/mi.) $560
* Land (FMV) $8,000
* Cash and Checks $7,250
* Total Contribution $15,810

Question 41

Describe Compliance in Charitable Contributions

Answer 41

Individuals report their charitable contribution deductions on Schedule A of Form 1040. Out-of-pocket expenses and contributions by cash or check are all reported on line 16. All contributions of property are included on line 17. If non-cash property contributions exceed $500 then Form 8283 (Non-cash Charitable Contributions) must be submitted in writing with the return. Form 8283 requires information about the type, location, holding period, basis, and FMV of the property.

If the contribution is made in cash, the taxpayer must retain evidence of the donation by keeping a canceled check or a receipt from the charitable organization. In the absence of a canceled check or receipt, other reliable written records showing the charity’s name and the date and amount of the contribution will be accepted. If the contribution is in the form of non-cash property, the taxpayer is required to maintain records containing the following information:
* Name and address of the charity to which the contribution was made
* Date and location of the contribution
* Description of the property
* FMV of the property
* Method of determining the property’s FMV
* Signed copy of the appraisal report, if an appraiser was used

Question 42

Describe Additional Compliance in Charitable Contributions

Answer 42

For charitable contributions of $250 or more, no deduction is allowed unless the contribution is supported by a written acknowledgment by the donee organization. (Separate payments generally are treated as separate contributions for purposes of applying the $250 threshold.) This acknowledgment must contain information regarding the amount of any cash contributions, a description of any property contributed, and whether or not the organization provided any goods or services in consideration for the cash or property received. This should include a description and good faith estimate of the value of any goods or services provided by the organization.

Certain disclosure requirements must be met by charitable organizations for a quid pro quo (a transaction that is partly a contribution and partly a payment for goods and services) contribution in excess of $75. This $75 limit is applied separately on each transaction. In order for such payments to be deductible, the donee organization must provide the donor with a written statement indicating that the amount of the deduction is limited to the excess of the cash and value of the contributed property over the value of the goods and services provided by the charitable organization. It must also provide a good faith estimate of the value of the goods and services provided to the donor by the charitable organization.

Question 43

Section Two Summary

A taxpayer must retain the evidence of charitable contributions to claim a deduction. The deduction amounts applicable for charitable contributions fall under certain limitations. These limitations are based on the individual, type of charitable organization, and the type of contribution.

In this lesson we have covered the following:

Answer 43

• Deductions for cash contributions to public charities are limited to 60% of AGI.
• 50% Limitation applies to individuals. The general overall limitation applicable to public charities is 50% of the taxpayer’s AGI for the year. Contributions in excess can be carried forward in the subsequent five tax years.
• 30% Limitation applies to contributions of capital gain property, which are subject to 30% of AGI instead of 50%. The capital gain property is generally valued at the property’s FMV. The 30% limitation does not apply if the property donated is not subject to related use or if the taxpayer elects to reduce the amount of charitable contribution deduction by the capital gain that is recognized if the property is sold. It applies to all types of property other than capital gain property such as cash and ordinary income property to a private non-operating foundation.
• 20% Limitation applies to contributions of capital gain property to private non-operating foundations.
• Applying the Deduction Limitations: The contributions subject to the 50% AGI limitation are taken into account before the contributions of 30% of the AGI limitation.
• Contribution of Services: When a taxpayer renders services to a qualified charitable organization the taxpayer may only deduct the unreimbursed expenses incurred incident to rendering the services. These items include out-of-pocket transportation expenses, the cost of lodging, the cost of meals while away from home, and the cost of a uniform without general utility that is required to be worn in performing the donated services.
• Compliance: A taxpayer must retain evidence of donations made in cash. Individuals report their charitable contributions using Schedule A of Form 1040. Form 8283 must be filled in case of non-cash property contributions if they exceed $500. For quid pro quo contributions in excess of $75, certain disclosure requirements must be met.

Question 44

Veronica’s AGI is $80,000, and she contributes $30,000 in cash to a public charity. What is the limitation amount for her and what amount will be deductible?
* Limitation amount: $48,000; deductible amount: $30,000
* Limitation amount: $30,000; deductible amount: $40,000
* Limitation amount: $30,000; deductible amount: $30,000
* Limitation amount: $40,000; deductible amount: $40,000

Answer 44

Limitation amount: $48,000; deductible amount: $30,000

The overall 60% limitation would apply in this case, as Veronica is an individual contributing $30,000 to a public charity. The deduction limitation amount for Veronica, if her AGI is $80,000, will be $48,000 (0.60 x $80,000). As $30,000 is less than $48,000, the amount that is fully deductible for Veronica is $30,000.

Question 45

During the past year, Martha traveled 12,000 miles by automobile while performing charity for a public charity, which cost her around $2,000. She is involved in a door-to-door campaign that involves the promotion of AIDS awareness among people. According to the automatic mileage method, what can she deduct?
* $1,680
* $1,000
* $2,000
* $2,680

Answer 45

$1,680

The actual cost for operating an automobile is not considered for deductions. Instead of the actual costs of operating an automobile while performing the donated services, the law permits a deduction of 14 cents per mile. Using the automatic mileage method to compute the charitable deduction, Martha can deduct $1,680 (0.14 x 12,000).

Question 46

Albert serves as a part-time volunteer with the American Red Cross. Which of the following unreimbursed expenses incurred by Albert for a weekend-long, overnight volunteering event can be deducted in full after rendering the service. (Select all that apply)
* Out-of-pocket transportation expenses
* Cost of meals
* Cost of lodging
* Cost of uniform
* Cost incurred while watching a movie

Answer 46

Out-of-pocket transportation expenses
Cost of meals
Cost of lodging
Cost of uniform

While contributing services to qualified charitable organizations and staying overnight, Albert can deduct the unreimbursed expenses incurred incident to rendering those services. These expenses include out-of-pocket transportation expenses, the cost of lodging, the cost of meals while away from home, and the cost of a uniform without general utility that is required to be worn in performing the donated services. Costs incurred for recreation purposes like movies cannot be deducted.

Question 47

In the case of non-cash property, the amount of the donation depends on what two factors:

Answer 47

• Type of property donated
• Type of qualifying organization, such as a public charity or private non-operating foundation, to whom the property is given

Question 48

__ ____??____ __ is defined as the donor’s entire interest in the property.

Answer 48

Complete interest is defined as the donor’s entire interest in the property.

A gift of property that consists of less than the donor’s entire interest in the property is not usually considered a contribution of property. For example, no charitable contribution is made when an individual donates the use of a vacation home for a charitable fund-raising auction.

Question 49

What are the exception transfers of partial interests in property do qualify as a contribution of property?

Answer 49

Generally, a charitable contribution of less than a donor’s entire interest in the property is not deductible. However, certain transfers of partial interests in property do qualify as a contribution of property. These are:
* The contribution of certain remainder interests to a trust.
* The transfer of a remainder interest in a personal residence or a farm, or a gift of a remainder interest in land for conservation purposes.
* Contribution of an undivided interest in property.
* A gift of partial interest if transferred in trust.

Question 50

Which of the following qualify as a contribution of property even though it is a transfer of partial interest? (Select all that apply)
* The contribution of certain remainder interests to a trust.
* Contribution of use of a vacation home for two weeks.
* The transfer of a remainder interest in a personal residence or farm.
* Contribution of an undivided interest in property.

Answer 50

Certain transfers of partial interests in property do qualify as deductible, including:
* the contribution of certain remainder interests to a trust,
* the transfer of a remainder interest in a personal residence or a farm,
* a contribution of undivided interest in property, and
* a gift of partial interest if transferred.

Question 51

Describe the Remainder Interest in Residence or Farm exception

Answer 51

The type of property interest given to charity affects the income tax limitation on deductions. If the remainder interest in a personal residence or farm is gifted to a qualified organization with a condition that the donor will be residing there for life, then the donor can take an income tax deduction for the value of the future gift. An assumption must be made that the gift is irrevocable.

Remainder Interest in a Residence Example:
If Robin gives her home or her farm to a qualified organization with the stipulation that she may live there for life, she may take a current income tax deduction for the value of the future gift. This assumes, of course, that the gift is irrevocable.

Question 52

Describe the Remainder Interest in Land for Conservation exception

Answer 52

Another circumstance in which a charitable contribution of less than the donor’s entire interest could generate a deduction, occurs when a donor makes a gift to a qualified charitable organization of a remainder interest in real property granted solely for conservation purposes.

Question 53

Describe the Contribution of Capital Gain Property exception

Answer 53

In general, the amount of a donation of capital gain property is its FMV. Regulation Section 1.170A-1(c)(2) defines a property’s FMV as the price at which the property would change hands between a willing buyer and a willing seller.

For purposes of charitable contributions, capital gain property is defined as property held over one year on which a capital gain would be recognized if it were sold at its FMV on the date of the contribution. If a capital loss or a short-term capital gain is recognized on the sale of the property, the property is considered to be ordinary income property for purposes of the charitable contribution deduction.

The tax law provides an exception to this general rule for contributions of capital gain property to private non-operating foundations.

Question 54

Capital gain property for charitable contribution purposes includes only property that would produce a long-term capital gain if sold.
* False
* True

Answer 54

True.

For purposes of charitable contributions, capital gain property is defined as property held over one year on which capital gain would be recognized if it were sold at its FMV on the date of contribution.

Question 55

Describe the deduction for contribution of property to a private non-operating foundation

Answer 55

A private non-operating foundation is an organization that does not receive funding from the general public (e.g., the Carnegie Foundation). Private non-operating foundations distribute funds to various charitable organizations that actually perform the charitable services.

The amount of the deduction for a contribution of property, other than certain qualified stock, to a private nonoperating foundation is the property’s FMV, reduced by the capital gain that would be recognized if the property were sold at its FMV on the date of the contribution. This means that generally the deductible amount of the contribution is the property’s adjusted basis.

Question 56

Taxation of a Donation to a Private Non-Operating Foundation Ex:

Betty purchased land in 1986 for $10,000. In the current year, she contributes the land to the United Way. At the time of the contribution, the FMV of the property is $25,000.
* What is the amount of the contribution?

On the other hand, if Betty donates the land to the Cherry Foundation, a private non-operating foundation,
* What is the amount of the contribution?

Answer 56

As the land is capital gain property donated to a public charity, the amount of the contribution is $25,000 (its FMV).

The amount of the contribution is $10,000 ($25,000 -$15,000 capital gain that would be recognized if the land were sold).

Question 57

What is the unrelated-use property exception?

Answer 57

Tangible property is property that has a physical structure (e.g., property other than stock, securities, copyrights, patents). Personal property is all property other than real estate.

Capital gain property that is also a tangible personal property, contributed to a public charity and used by the organization for purposes unrelated to charity functions, is called unrelated-use property. In such exceptional situations, the amount of the contribution deduction is equal to the property’s FMV minus the capital gain that would be recognized if the property were sold at its FMV (the property’s adjusted basis).

The taxpayer is responsible for proving that the property was not put to unrelated use. However, a taxpayer meets this burden of proof if, at the time of the contribution, the taxpayer reasonably anticipates that the property will not be put to unrelated use. The immediate sale of the property by the charitable organization is considered to be a use unrelated to its tax-exempt purpose.

Question 58

Unrelated-Use Charitable Donation Example:

Laura purchases a painting for $3,000. Several years later she contributes the painting to a local college. The FMV of the painting is $5,000 at the time the property is contributed. The painting is both tangible personal property and capital gain property. The college places the painting in the library for display and study by art students. As the college does not use the painting for purposes unrelated to its function as an educational institution,
* What is the amount of Laura’s contribution?

On the other hand, if the college had sold the painting immediately after receiving it,
* What is the amount of Laura’s contribution?

Answer 58

As the college does not use the painting for purposes unrelated to its function as an educational institution, the amount of Laura’s contribution is equal to the painting’s FMV ($5,000).

On the other hand, if the college had sold the painting immediately after receiving it, the presumption is that the property’s use was unrelated to the college’s tax-exempt purpose. In this case, Laura’s contribution is only $3,000.

Question 59

How do you calculate deduction for Contribution of Ordinary Income Property?

Answer 59

The general rule is that if ordinary income property is contributed to a charitable organization, the deduction is equal to the property’s FMV minus the amount of gain that would be recognized if the property were sold at its FMV on the date of the contribution. In most cases, this deduction is equal to the property’s adjusted basis. This rule applies regardless of the type of charitable organization to which the property is donated.

Question 60

List types of ordinary income property

Answer 60

For this purpose, ordinary income property includes any property that would result in the recognition of income taxed at ordinary income rates if the property were sold.

Ordinary income property includes:
* inventory
* works of art
* manuscripts created by the taxpayer
* capital assets that have been held for one year or less
* Section 1231 property, to the extent a sale would result in the recognition of ordinary income due to depreciation recapture. Section 1231 property includes property used in a trade or business that is subject to depreciation. If it is sold at a gain, part or all of the gain is treated as ordinary income.

Question 61

Contribution of Ordinary Income Property Example #1:

During the current year, Bart purchases land as an investment for $10,000. Five months later he contributes the land to the United Way. At the time of the contribution, the property’s FMV is $15,000.
* What is the amount of Bart’s contribution?

Answer 61

The amount of Bart’s contribution is $10,000 ($15,000 - [$15,000 - $10,000]) because he held the land for less than one year.

Question 62

Contribution of Ordinary Income Property Example #2:

Paul purchased a truck a few years ago for $20,000. During the current year, Paul donates the truck previously used in his business to a local community college. At the time of the contribution, the truck’s adjusted basis is $5,000 and its FMV is $8,000.
* What is the amount of Paul’s contribution?

Answer 62

As Paul would have recognized a $3,000 gain (all ordinary income under Section 1245) if the truck were sold at its FMV, the amount of the contribution is $5,000 ($8,000 - $3,000), which is equal to the truck’s adjusted basis.

Question 63

Larry contributes a painting to a local museum for display. His AGI is $40,000. Larry paid $15,000 for the painting two years ago, but its market value at the contribution date is $22,000. If Larry makes the election to reduce the contribution by certain gains, what will be his deductible contribution for this year?
* $15,000
* $22,000
* $20,000
* $12,000

Answer 63

$22,000

If a taxpayer elects to reduce the value of a contribution of capital gain property, the deduction is equal to the property’s FMV minus the amount of gain that would be recognized if the property were sold at its FMV on the date of contribution.

In this case, by electing to reduce the value of his contribution, Larry is able to deduct $15,000, calculated as follows:
$22,000 (FMV on contribution date) - $7,000 (gains) = $15,000

Since the contribution will be ‘use-related’ and put to use by the museum and Larry has reduced the contribution value, he is permitted to deduct up to 50% of his AGI (i.e., $40,000 x 0.50 = $20,000). The donation of the painting falls below the AGI limitation.

Question 64

Describe Donation of Inventory by a Corporation

Answer 64

A corporation’s donation of inventory to certain public charities is considered a charitable contribution under certain circumstances. This contribution is valued at the adjusted basis of inventory.

There are three exceptions:
* The inventory is to be used by the charity solely for the care of the ill, those in need, or infants.
* Donation of scientific equipment constructed by the taxpayer and donated to a college, university, or qualified research organization, to be used for research, experimentation, or research training in the physical or biological sciences.
* Contributions of computer technology and equipment donated to public libraries and elementary and secondary schools.

In all three cases, the amount of charitable contribution is the property’s FMV, reduced by 50% of the ordinary income, if the property were to be sold at its FMV. However, the amount of the contribution is limited to twice the basis of the property.

Question 65

Donation of Inventory by a Corporation Example:

During the current year, Able Corporation, a manufacturer of medical supplies, donates some of its inventory to the American Red Cross. The Red Cross intends to use the inventory for the care of the needy and ill. At the time of the contribution, the FMV of the inventory is $10,000. Able’s basis in the inventory is $3,000.
* What is the amount of Able’s contribution?
* What is the contribution limit amount?

Answer 65

As this transaction qualifies under the exception, the amount of Able’s contribution (before any limitations are applied) is $6,500 [$10,000 - (0.50 x $7,000)].

But the actual amount of the contribution is limited to $6,000 (two times the $3,000 basis in the property).

Question 66

Section Three Summary

If a taxpayer makes a contribution in cash, the amount of the deduction is easily determinable. However, if non-cash property is donated, the amount of the contribution is not as easy to identify.

In the case of non-cash property, the amount of the donation depends on two factors: the type of property donated and the type of qualifying organization, such as a public charity or private non-operating foundation, to whom the property is given.

In this lesson we have covered the following:
* Gifting Less than Complete Interest is a gift of property that consists of less than the donor’s entire interest in the property is not usually considered a contribution of property. For example, no charitable contribution is made when an individual donates the use of a vacation home for a charitable fund-raising auction.

Answer 66

• Contribution of Capital Gain Property- is its FMV. Property held for over a year on which a capital gain would be recognized if it were sold at its FMV when contributed is defined as capital gain property. In contrast, if the property that has generated a capital loss or a short-term capital gain is recognized, it is defined as ordinary income property. The exception to this general rule is the contribution of capital gain property to private non-operating foundations.
• Contribution of Ordinary Income Property -to a charitable organization allows a deduction equal to the property’s FMV minus the amount of gain that would be recognized if the property were sold at its FMV on the date of the contribution. In most cases, this deduction is equal to the property’s adjusted basis.

Question 67

Module Summary

Under IRC Section 170, corporations and individuals who itemize their deductions can deduct charitable contributions to qualified organizations. The charitable contributions available for any tax year are subject to certain deduction limitations. These limitations are based on the type of gift contributed and the qualifying organization to which contributions are made. The amount of tax deductions can be easily determined in the case of cash contributions but is not as easily determined when non-cash contributions are made.

The key concepts to remember are:
* Charitable Contributions: Qualified organizations are classified as public charities, private charities, and private non-operating foundations. To be deductible under federal income tax, contributions must be made to qualified organizations and the proof of these contributions must be shown. Contributions that exceed the limitations may be carried over and deducted in the subsequent five years using the application of the carryover method.

Answer 67

• Deduction Limitations: The overall 50% limitation applies to individuals. This limitation is applicable to public charities, and it is calculated as 50% of the taxpayer’s AGI. A special limit of 60% AGI applies to cash contributions to 50% organizations. Excess contributions can be carried forward and deducted in the subsequent five years. Limitations are imposed by the tax laws on contributions of capital gain property to a public charity or private nonoperating foundation. Tax laws are also imposed on all types of property contributed to private non-operating foundations. For the contribution of capital gain property a limitation of 30% is applied. This limitation does not apply if the property is not subject to related use. A 20% limitation applies to capital gain property contributed to private non-operating foundations. Contributions subject only to the 50% of AGI limitation are accounted for before the contributions subject to the 30% of AGI limitation.
• Type of property contributed: In the case of non-cash property contributions, the amount of the tax deduction depends on the type of the qualifying organization and the type of property contributed. A gift less than the complete interest in a property is not a deductible contribution. The amount of donation for capital gain property is its FMV. Capital gain property is defined as property held over one year on which a capital gain would be recognized if it were sold at its FMV on the date of the contribution for purposes of charitable contributions. In the case of ordinary income property, the deduction is equal to the property’s FMV minus the amount of gain that would be recognized if the property were sold at its FMV on the date of the contribution.

Question 68

Tammi’s AGI is $90,000 and she donates $35,000 to her church and $25,000 to a private nonoperating charity.
Calculate the permitted amount of deduction for the contribution to the private nonoperating charity.
* $19,000
* $54,000
* $25,000
* $27,000

Answer 68

$19,000

Tammi’s deduction for the contribution to the private nonoperating charity (a 30% charity) is limited to $19,000 (The lesser of these three amounts):
Description - Amount in Dollars
* The actual contribution - $25,000
* The remaining 60% limitation after the contribution to Tammi’s church [(0.60 × $90,000) - $35,000] - $19,000
* 30% of AGI (0.30 x $70,000) - $27,000

Question 69

During the current year, Barry purchases land as an investment for $70,000. Ten months later he contributes the land to the St. Jude’s Hospital. At the time of the contribution, the property’s FMV is $85,000.
Calculate the amount of Barry’s contribution.
* $15,000
* $35,000
* $70,000
* $85,000

Answer 69

$70,000

The amount of Barry’s contribution is $70,000 ($85,000 - [$85,000 - $70,000]) because he held the land for less than one year.

Question 70

Any contributions that exceed the deductible gift limitations may be carried over and deducted in the subsequent __ ____??____ __.
* three years
* five years
* ten years
* two years

Answer 70

five years

Any contributions that exceed the deductible gift limitations may be carried over and deducted in the subsequent five years.

Question 71

A __ ____??____ __ is a charitable gifting vehicle that allows money to be set aside for charity and provides a variable payment each year.
* Pooled Income Fund (PIF)
* Charitable Remainder Annuity Trust (CRAT)
* Charitable Lead Trust (CLT)
* Charitable Remainder Unitrust (CRUT)

Answer 71

Pooled Income Fund (PIF)

A Pooled Income Fund (PIF) is a charitable gifting vehicle that allows money to be set aside for charity. The grantor receives a variable payment each year. It avoids capital gains taxes on appreciated securities and allows the donor to take a partial tax deduction and generate lifetime income for as many as two beneficiaries.

Question 72

Corporate charitable deductions are limited to __ ____??____ __ of the corporation’s taxable income for the year.
* 20%
* 21%
* 25%
* 15%

Answer 72

25%

Corporate charitable deductions are limited to 25% of the corporation’s taxable income for the year.

Question 73

Identify the amount of the permitted contribution on capital gain property that is tangible personal property and is donated to a public charity for an unrelated use.
* The greater of the FMV or adjusted basis
* The lesser of the FMV or adjusted basis
* Adjusted basis
* FMV on the date of the gift

Answer 73

The lesser of the FMV or adjusted basis

Capital gain property that is tangible personal property and is donated to a public charity. If the property is not put to its related use, the amount of the contribution is reduced to the lesser of the FMV or the basis.

Question 74

Cash contributions to public charities have a __ ____??____ __ of AGI limitation.
* 30%
* 50%
* 20%
* 60%

Answer 74

60%

Cash contributions to public charities have a 60% of AGI limitation.

Question 75

Identify the public charities. (Select all that apply)
* Churches or conventions
* A qualified governmental unit
* Medical schools
* Corporate Foundation
* Family Foundation

Answer 75

Not corportate or family foundation.

Public charities include:
* Churches or conventions and associations of churches
* Educational institutions that normally maintain a regular faculty, curriculum and regularly enrolled students
* Organizations such as hospitals and medical schools, whose principal function is medical care or medical education and research
* Government-supported organizations that exist to receive, hold, invest and administer property for the benefit of a college or university
* Any qualified governmental unit
* Organizations that normally receive a substantial part of their support from either a governmental unit or the general public
* Certain private operating foundations

Question 76

Which of the following is a trust designed to permit payment of a fixed amount annually to a noncharitable beneficiary with the balance going to charity?
* Charitable Lead Trust (CLT)
* Charitable Remainder Unitrust (CRUT)
* Pooled Income Fund (PIF)
* Charitable Remainder Annuity Trust (CRAT)

Answer 76

Charitable Remainder Annuity Trust (CRAT)

A Charitable Remainder Annuity Trust (CRAT) is a trust designed to permit payment of a fixed amount annually to a noncharitable beneficiary with the remainder going to charity.

Question 77

If a single gift of more than __ ____??____ __ is donated to a qualifying charity, to be eligible for a deduction, a receipt must be shown for the gift.
* $250
* $1,000
* $5,000
* $600

Answer 77

$250

Charitable gifts made to qualified organizations qualify as tax deductions. If there is a single gift of more than $250, a receipt must be shown for the gift.