General Tax Benefits of Charitably Giving

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:

• As Per Internal Revenue Code §170” There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year.”
• As per Internal Revenue Code §2055100% of the gross estate can be donated and deducted.
• As per Internal Revenue Code §642(c) 100% of personal income can be donated and deducted.

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”
• 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 for5 years (6 tax returns)

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)