Taking Individual Charitable Giving to Its Limit

By Campbell, Linda | The CPA Journal, September 2012 | Go to article overview

Taking Individual Charitable Giving to Its Limit


Campbell, Linda, The CPA Journal


Understanding Related Rules and Court Decisions

Individual taxpayers have traditionally been strong charitable givers, even in stressful economic times. In 2011, nonprofit giving in the United States recovered at a steady pace from pre-recession levels, according to recent reports by Blackbaud Inc. and Atlas of Giving, national organizations that provide analysis trends of charitable giving. Statistics indicate that individual donors accounted for 75% of all U.S. giving; the remainder came from foundations (13%), bequests (7%), and corporations (5%).

Under Internal Revenue Code (IRC) section 170, favorable tax treatment for charitable giving in the United States exists for an individual's contributions to legally designated (qualified) nonprofit organizations; however, meeting all of the requirements for deductible charitable giving can be a daunting task for many taxpayers, especially given the significant changes that have taken effect in recent years and additional modifications under consideration by Congress. Numerous recent court decisions provide evidence for the challenges that financial planners and their clients face (e.g., Rolf v. Comm'r, 109 AFIR 2d 2012-828; Henrìcus C. van der Lee v. Comm'r, T.C. Memo 2011-234).

The discussion below examines the current limitation requirements for deducting charitable gifts made by individual taxpayers. Although many individuals might be concerned about potential increases in their income taxes, they might not be familiar with the most recent charitable giving rules, including substantiation requirements and the potential return of the Pease limitation for 2013. An in-depth understanding of these topics helps financial planners advise clients on how to handle current charitable giving, as well as upcoming changes in 2013.

Furthermore, various issues and rulings from recent court cases and general deduction policies are addressed below, as well as the very stringent documentation changes introduced by the Pension Protection Act of 2006. CPAs who understand these issues can discuss them with individuals contemplating complex charitable donations.

Defining a Charitable Contribution

The term charitable contribution, as defined under IRC section 170(c), means a contribution or gift to, or for the use of, the following:

* A state, a possession of the United States, or any related political subdivision of these, or the United States or the District of Columbia (D.C.), but only if made for exclusively public purposes (e.g., a gift to reduce the public debt)

* A corporation, trust, community chest, fund, or foundation that is created or organized in the United States or its possessions, or under the law of the United States, any state, D.C., or U.S. possessions and is organized exclusively for religious, charitable, scientific, literary, or educational purposes; to foster national or international amateur sports competition; for the prevention of cruelty to children or animals (e.g., United Way, American Cancer Society, American Society for the Prevention of Cruelty to Animals, U.S. Olympic teams, and the Salvation Army); as a post or organization of war veterans; or as an auxiliary unit or society of, or trust or foundation for, any such entity, if it is organized within the United States or any of its possessions (e.g., Veterans of Foreign War, United Service Organizations [USO], and Navy League)

* A cemetery company owned and operated exclusively for the benefit of its members, or any corporation chartered solely for burial purposes (with limitations as noted in IRC section 170[c][5])

* A domestic fraternal society, order, or association operating under the lodge system, but only if the contribution (above and beyond dues) is to be used exclusively for purposes as stated above (e.g., Shriners, Lions Club, Rotary Club).

Limitations to Annual Deductible Giving

If the total charitable giving for a year is 20% or less of an individual's contribution base (defined as adjusted gross income [AGI] computed without regard to any net operating loss carryback to the taxable year), there are no limit considerations. …

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