Practice Strategies

Charitable Giving—Diagnosing the Rules

When contemplating making a significant gift, the charitably inclined are well advised to exercise some foresight. Similar gifts made in different ways will yield remarkably different results. The treatment of your gift for federal tax purposes will vary depending on the type of asset donated, the type of charitable organization receiving the gift, and your individual circumstances and overall tax status.

Gift Classifications

Gifts funded with different types of assets are subject to different restrictions on deductibility. The Internal Revenue Code (IRC) generally classifies different types of property according to a four-tier system: 1) ordinary income property; 2) short-term capital gain property; 3) long-term capital gain property; and 4) tax-free property. Property is also classified as either being intangible property (securities, bonds, mutual funds, etc.) or tangible personal property (artwork, collectibles, jewelry, etc.).

There are also deductibility limitations imposed on donations depending on the structure of the recipient charity. Organizations are classified as public charities and private foundations. Gifts to private foundations are far more restricted because of concerns relating to the potential for abuse by donors or foundation officials.

Valuation and Eligibility

Donors must categorize their donations in accordance with the above classifications in order to determine the valuation of their gift for the purpose of claiming a charitable deduction. For example, deductions for gifts of cash (including by check) are simply equal to the amount of the gift. Gifts of tangible personal property that can be directly used to advance the recipient charity’s tax-exempt purpose, or gifts of long-term appreciated intangible property, are eligible for a deduction based upon the fair market value (FMV) of the donated asset. Gifts of tangible personal property not for exempt use, short-term appreciated intangible property, or ordinary income property are eligible for a deduction based on the original cost (less depreciation) or fair market value of the donated asset, whichever is less.

There are additional limits on gifts of real estate, which may be reduced by any “depreciation” deductions taken over the years. There are also special restrictions regarding gifts of stock, based on the incorporation status of the company. You are not eligible to claim a deduction at all for contributing personal services to a charity or letting a charity use your property rent-free.

Any single contribution exceeding $5,000 (except one funded with cash or publicly-traded stock) requires a qualified appraisal within 60 days of the date of gift. All gifts of $250 or more require written acknowledgment from the recipient charity in order to claim a deduction, though it is prudent to obtain a receipt for gifts of any size.

Income Limitations

The final factor affecting your ability to claim a charitable deduction pertains to limitations associated with the size of your adjusted gross income (AGI). Your deduction for gifts of cash to a public charity may not exceed 50% of AGI in any one year, while your deduction for cash gifts to a private foundation may not exceed 30% of AGI. For gifts of both long- and short-term appreciated property, your deduction is limited to 30% of AGI for gifts to public charities and 20% of AGI for gifts to private foundations. The limitations on both cash and appreciated property work in tandem, capping total charitable deductions for any one year at 50% of AGI. Deductible amounts above these limits may be carried forward for up to five additional, consecutive tax years. Higher income donors must also be wary of restrictions on total itemized deductions, which are gradually phased out above certain levels of AGI.

The rules governing charitable giving can be complex. If you intend to make a significant gift, give us a call for guidance.

For more information about our services to the healthcare industry, Contact:
Maxine Lawyer, Director of Healthcare Services at 972.448.6905.

The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.
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