In this 5-minute video, Jerry discusses the limits on deductions for charitable donations. This is one of the most confusing topics for individuals trying to maximize their tax savings and estate planning goals. On the surface the multiple overlapping rules and limits may seem confusing, but the process is rather simple once you know the steps!
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There are many limits and percentages involved with charitable deductions, but the most important one is the total charitable deduction limit of 60% of AGI. So, if you make $100k a year you can deduct up to $60k worth of donations. This limit is the aggregate limit for all deductions made each year. The next set of limits has to do with the type of charity you are donating to and the type of asset you are donating.
First, we have public charities, these are the most common type of charitable organizations. Some examples would be the Red Cross, major religious groups, hospitals and universities.
Different types of assets have different sub-limits. Cash is king so you can deduct the full 60% of your AGI for cash donations. LTCG property allows a limit of 50% if you choose to value the property at its cost basis. If you choose to value LTCG assets at its fair market value the limit is 30%. STCG can only be valued at basis and has a limit of 50%. This means if you want to donate non-cash items you will have to donate multiple assets or to multiple charities in order to fully max out your 60% total deduction amount.
Up next we have private charities. These are most commonly private foundations such as the Bill and Malinda Gates Foundation, the Coca-Cola Foundation, or the Walton Family foundation.
Private foundation donations function the same way as public charities, with the difference being their allowable deduction percentages are lower. Only 30% for cash or assets valued at basis and 20% for LTCG valued at fair market value. Remember STCG assets can only be valued at basis .
To help you understand how these percentages interact with each other lets work through an example.
Let’s say you make $100k a year, this means your total deduction limit for the year is 60% of your AGI or $60k.
You decide to donate $4k in cash to a local hospital and $60k worth of LTCG stock to your old university. You also donate $31K to your friend’s private family foundation.
First, let’s see how much we can deduct from the public charity donations. Cash is king so we can take the full $4k deduction on the hospital donation.
We can choose to value the $60k LTCG stock at basis and deduct up to 50% of our AGI, BUT when people donate LTCG stock it is usually because it has greatly appreciated meaning its cost basis is much less than its fair market value. That’s the case here, so let’s value the LTCG stock at its fair market value of $60k, which means we can deduct up to 30% of our AGI or $30k.
We are able to take a total deduction of $34k for our public charity donations. The remaining $30k will be carried forward and applied to next year’s deductions.
Next, let’s figure out our Private charity deductions. Some people may assume we can deduct $30k of the donation to a private charity since the limit on cash is 30% of AGI for private foundations but remember that our total deduction limit is 60% of AGI or $60,000. We have already used 34% or $34k of our deduction limit on the public side, so we are left with only 26% or $26k on the private side.
The remaining $5K on the private side will also be carried forward and applied to next year’s deductions.