Don’t Lose the Deduction! Charitable AGI Limitations & Ordering Rules
Author: Susan Jones
According to Giving USA’s most recent annual report, Americans are contributing more to charity than ever; we gave $358 billion in 2014—the highest total ever, even adjusted for inflation. These charitable dollars largely came from individual donors whose gifts comprised 72 percent of the total.
When planning for these charitable gifts, taxpayers who itemize their deductions may take into consideration the potential tax benefit from their donations. In addition to ensuring gifts are made to qualified charities and record-keeping requirements are followed, taxpayers should be aware of the annual tax deduction limits on charitable deductions and how these limits might affect the potential tax benefit from a charitable gift.
Several factors affect the amount of charitable contributions an individual can deduct in any one tax year, including the types of organizations to which the contributions are made as well as the nature and value of the contributions. For this purpose, charities are classified as either “50 percent organizations” or “non-50 percent organizations.”
Fifty percent charities include churches, schools, hospitals, governmental entities, private operating foundations and other not-for-profit agencies organized for charitable, religious, educational, scientific or literary purposes. A cash gift to one of these is deductible as long as it doesn’t exceed 50 percent of the taxpayer’s adjusted gross income (AGI) for the year. For non-50 percent charities, such as private nonoperating foundations and veterans organizations, the annual AGI limitation for cash gifts is reduced to 30 percent.
Gifts of appreciated, long-term capital gain property, such as stock, may be subject to lower AGI limits. If the donation value is determined using the property’s fair market value (as opposed to the property’s lower cost basis), the AGI threshold for gifts to 50 percent and non-50 percent organizations are reduced to 30 percent and 20 percent, respectively.
After applying these AGI limitations, taxpayers also are subject to a maximum deduction of 50 percent of AGI for total gifts. For example, if a taxpayer with an AGI of $100,000 contributes $40,000 in cash and long-term appreciated stock with a fair market value of $25,000 to a 50 percent charity, the taxpayer’s total deduction for that year will be limited to $50,000, even though each gift did not exceed the AGI limitation for that particular type of property.
In the example above, the additional $15,000 of charitable donations may be carried forward for up to five years. However, taxpayers should use caution when dealing with charitable contribution carryforwards, as specific ordering rules must be applied to determine the amount of deductible contributions in subsequent years, often with surprising results.
In the example above, the $15,000 gift will carry forward as a gift subject to the 30 percent limitation, as—under the ordering rules—gifts of cash to a 50 percent organization are applied first to the overall 50 percent limitation. If the taxpayer makes no other gifts in Year Two, the full $15,000 of charitable contribution carryforward may be used so long as the taxpayer’s AGI is at least $50,000. On the other hand, if in Year Two the taxpayer’s AGI is reduced to $60,000 and the taxpayer makes an additional $30,000 cash gift to a 50 percent organization, no part of the $15,000 charitable contribution carryforward will be used, as—under the ordering rules—current-year gifts are applied first against the AGI limitations. Without proper planning, this taxpayer may be unable to use the contribution carryforward within the five-year carryforward window, permanently losing the potential tax benefit.
Taxpayers planning for year-end giving should consult their tax advisor to make sure significant gifts are structured to realize the largest tax benefit while meeting philanthropic goals.
Tax Planning Tips
The IRS provides a helpful search tool on its Exempt Organizations Select Check website that allows users to search for and select an exempt organization and check certain information about its tax status, including whether the exempt organization is a 50 percent or non-50 percent organization.
Taxpayers looking to make a significant charitable gift should consider making the gift in a year in which AGI will be particularly high to realize the largest possible current-year deduction and tax benefit. If the taxpayer would prefer to make the gift to a charity or charities over an extended time period, he or she may consider a donor-advised fund, which lets the taxpayer receive a current-year deduction but retains the flexibility to direct the payout of the fund to charities of their choosing in later years.