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Skirt tax limits on charitable donations

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in Small Business Tax,Small Business Tax Deduction Strategies

Despite what you may think, not all charities are created equal. Some organizations qualify as “50% charities” while others are “30% charities.” Different tax limits based on your adjusted gross income (AGI) may apply.

Strategy: Maximize deductions for your generosity. For instance, you might shift charitable donations from one type of charity to another, especially if you plan on giving large gifts or you expect to have a low AGI this year.

If you’re careful, you can deduct the full amount of your contributions, by staying within the tax law boundaries. Saving grace: Donations you can’t deduct this year are carried over to next year and the following four years if necessary.

Here’s the whole story: Generally, you can deduct cash (or cash-equivalent) donations, assuming you meet strict substantiation requirements. If you donate property instead of cash, the deduction is generally limited to the cost of the property. But you can usually deduct the fair market value of long-term capital gain property you’ve held more than one year, such as stocks.

Note: Other special rules may apply to gifts of property.

As the names imply, the total deduction for gifts to 50% charities can’t exceed 50% of your AGI for the year, while donations to 30% charities are limited to 30% of AGI. The list of 50% charities includes most religious groups, schools, hospitals and public charitable organizations. Certain others, such as veterans associations and some private foundations, are designated as 30% charities.

But here’s where things get really complicated. If you give long-term capital gain property to a 50% charity, your deduction is limited to 30% of your AGI. And, if you donate the property to a 30% charity, the deduction can’t exceed 20% of your AGI.

It’s easy to get tripped up by these rules if you don’t watch out.

Example: Suppose you give $5,000 to a religious organization this year. In addition, you donate to your alma mater stock you acquired years ago that is now worth $45,000. Finally, you give $10,000 in cash to a 30% charity. Let’s assume your AGI is $100,000.

How much can you deduct? It breaks down as follows:

  • The $5,000 cash donation to the church is fully deductible.
  • The gift of stock to the school is $45,000, but it’s limited to 30% of your AGI. So the maximum you can deduct is $30,000 (30% of $100,000). That gives you a total of $35,000.
  • Normally, you could deduct the entire $10,000 donated to the 30% charity. But you’re already over the 30% limit, so your deduction for this gift is zero.
  • Therefore, your total deduction is reduced to $35,000—even though you’ve donated cash and property worth $60,000 (the $25,000 that you can’t currently deduct [$60,000 – $35,000] is carried over to next year).

In this situation, you may reconsider your gift-giving pattern. For example, if you give $10,000 in cash to a 50% charity instead of a 30% charity, the $10,000 is fully deductible this year. Or you might wait until next year to give the 30% charity the cash or give the gift of stock to the school.

Tip: If your charitable donations exceed the deduction ceiling for the current year, you can carry forward the remainder for up to five years.

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