GIFTS TO CHARITY
You’ve heard the expression, pigs get fat and hogs get slaughtered. Nowhere is that more
true than in gifts to charity. Years ago people made large gifts of cash and property to public and private charities and received full deductions. Then tax shelter promoters got involved and generated even larger but groundless deductions. This abuse became widely known and Congress clamped down with a flurry of new restrictions.
Today, one of the most frequently asked questions I receive concern charitable contributions. This is another area of federal tax law that needlessly becomes more and more complex every year. Over the next few weeks I will discuss several areas of interest in the hopes that some of these needless complexities can be clarified.
The general rule is quite simple. Individuals, corporations and certain other types of entities can deduct charitable contributions subject to certain requirements and certain percentage limitations. However, these rules are so complex that even many charities do not know and understand them properly.
Lets talk about cash contributions first. The federal tax law provides that an individual may claim a deduction for charitable contributions of cash but not to exceed a certain percentage of his “contribution base” (basically his adjusted gross income or AGI).
If you will take a look at your year 2000 tax return, you will note that after your wages are entered there are a number of adjustments before you arrive at your AGI. These adjustments include business losses, losses from the sale of property, rental losses, contribution to retirement plans, even alimony and moving expenses. When all of these are factored in, many people can lose the benefit of a charitable deduction in that year because of the 50% AGI limitation.
In addition, only certain charities qualify for the 50% limitation. Other charities are limited to 30% of your AGI, others to 20%! That’s right, the federal tax law limits the amount you can deduct to only a portion of your income, and then further limit it depending on the type of charity receiving the contribution.
So what is a 50% charity? Well, generally a church, school, hospital, governmental body, and “publicly supported” organizations are a 50% charity. A 30% charity includes most private foundations, war veterans organization, fraternal orders and cemetery companies. A 20% limitation applies to contributions of certain kinds of property and to certain kinds of private foundations.
Furthermore, this is the tip of the iceberg. Unfortunately tax shelter promoters (hogs) have so badly abused the simple rules of charitable contributions that Congress has passed an enormous number of protective laws (slaughter). Giving to charity is not simple, even if cash is given. I know accountants who specialize in this area. The easy answer: call your accountant beforehand and confirm (pray) that none of the limitations rules apply to you. If you are involved in a charity, make sure you have a good accountant familiar with these issues.
Next week, more on this mess.