What limitations exist on tax planning strategies for charitable contributions?
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The limitations on tax planning strategies for charitable contributions are extensive and have become more complex with the enactment of the One Big Beautiful Bill Act (OBBBA, P.L. 119-21), effective for tax years beginning after December 31, 2025. The key limitations and considerations are as follows:
1. Percentage Limitations Based on Type of Contribution and Recipient
For Individuals
- 60% Limit for Cash Contributions to Public Charities: Cash gifts to public charities (as defined in IRC §170(b)(1)(A)) are deductible up to 60% of the taxpayer’s adjusted gross income (AGI). This limit is now permanent. However, the 60% limit is reduced by the amount of noncash contributions deducted under the 50% limit, so the 60% limit applies only to the extent that cash contributions exceed the 50% limit for noncash gifts.
- 50% Limit for Noncash Contributions to Public Charities: Noncash gifts to public charities are subject to a 50% of AGI limit.
- 30% Limit for Capital Gain Property to Public Charities: Gifts of appreciated capital gain property (e.g., stock held more than one year) to public charities are limited to 30% of AGI.
- 20% Limit for Gifts to Non-Public Charities: Gifts to certain private foundations and other non-public charities are limited to 20% of AGI.
- Qualified Conservation Contributions: These may be deductible up to 50% of AGI, or 100% for qualified farmers and ranchers, with special carryover rules.
For Corporations
- 10% Limit for Most Gifts: The deduction for charitable contributions is generally limited to 10% of taxable income.
- 1% Floor: Under OBBBA, only contributions exceeding 1% of taxable income are deductible, up to the 10% cap.
2. New Charitable Deduction Floors (OBBBA)
- Individuals: Only the amount of charitable contributions exceeding 0.5% of AGI is deductible. For example, if 0.5% of AGI is $1,000 and the taxpayer donates $5,000, only $4,000 is deductible (subject to other limits).
- Corporations: Only the amount exceeding 1% of taxable income is deductible, up to the 10% cap.
3. Carryforward Rules
- Five-Year Carryforward: Excess contributions that cannot be deducted due to percentage limits can generally be carried forward for up to five years. The amount disallowed by the new floors (0.5% for individuals, 1% for corporations) increases the carryforward if there is already a carryforward; otherwise, the disallowed amount is lost.
4. Ordering Rules for Applying Limits and Floors
- The 0.5% floor for individuals is applied in a specific order: first to 20% limit gifts, then 30% capital gain gifts, then 30% noncapital gain gifts, then 50%/100% conservation gifts, then 50% noncash gifts, and finally 60% cash gifts.
5. Substantiation and Appraisal Requirements
- Cash Gifts: Require a bank record or written communication from the donee showing the name, date, and amount.
- Noncash Gifts Over $500: Require a detailed description with the tax return.
- Noncash Gifts Over $5,000: Require a qualified appraisal and additional documentation.
- Noncash Gifts Over $500,000: The appraisal itself must be attached to the return.
6. Valuation and Quid Pro Quo Rules
- Only the portion of a payment that exceeds the fair market value of any goods or services received is deductible. For example, if a fundraising dinner ticket costs $200 and the dinner is worth $80, only $120 is deductible.
- If the value of the benefit received equals or exceeds the payment, no deduction is allowed.
7. Special Rules for Certain Property
- Ordinary Income Property: Deduction is limited to the lesser of fair market value or basis.
- Appreciated Property: Deduction is generally fair market value, but subject to the 30% limit and possible reduction if contributed to certain private foundations.
- Fractional Interests: Strict rules apply to gifts of partial interests in property, including recapture provisions if the entire interest is not eventually donated.
8. Nonitemizer Deduction (Above-the-Line)
- Nonitemizers may deduct up to $1,000 ($2,000 for joint filers) for cash gifts to public charities, not including donor-advised funds or supporting organizations.
9. Overall Limitation on Itemized Deductions
- For high-income taxpayers, itemized deductions (including charitable contributions) are reduced by 2/37 of the lesser of total itemized deductions or the amount by which taxable income exceeds the 37% bracket threshold, effectively limiting the benefit to a 35% rate.
10. Other Limitations and Disallowances
- No Deduction for Gifts to Individuals: Only gifts to qualified organizations are deductible.
- No Deduction for Certain Trusts or Entities: Gifts to certain trusts or organizations may not be deductible unless specific requirements are met.
- No Deduction for Gifts with Substantial Personal Benefit: If the donor receives a substantial benefit, the deduction is reduced or disallowed.
- No Deduction for Certain Partial Interests: Except for specific exceptions (e.g., remainder interests in a personal residence or farm, undivided portions, or qualified conservation contributions), partial interest gifts are not deductible.
11. Planning Implications
- The introduction of floors and the return of overall itemized deduction limits mean that traditional strategies (such as bunching deductions or gifting appreciated property) may not yield the same tax benefits as before.
- Careful planning is required to maximize the deduction, including the timing of gifts, the type of property donated, and the selection of recipient organizations.
- Taxpayers should also consider the impact of carryforwards and the ordering of deductions to avoid losing potential tax benefits.
12. Documentation and Compliance
- Failure to meet substantiation, appraisal, or reporting requirements can result in the loss of the deduction, regardless of the gift’s value or recipient.
Summary: The limitations on charitable contribution deductions now include not only the traditional percentage caps and substantiation requirements, but also new floors for both individuals and corporations, a permanent above-the-line deduction for nonitemizers, and a new overall limitation on itemized deductions. These changes require donors to carefully plan and document their charitable giving to ensure maximum tax benefit and compliance with the law.
If you have a specific scenario or type of charitable gift in mind, please provide more details for a tailored analysis.
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