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REG CPA Practice Questions Explained: How to Deduct Charitable Contributions

How to Deduct Charitable Contributions

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In this video, we walk through 5 REG practice questions demonstrating how to deduct charitable contributions. These questions are from REG content area 4 on the AICPA CPA exam blueprints: Federal Taxation of Individuals.

The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.

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How to Deduct Charitable Contributions

Here’s a comprehensive overview of how to deduct charitable contributions as itemized deductions on U.S. federal income tax returns:

Qualified Organizations: Only contributions to qualified organizations are deductible. These typically include religious groups, charitable organizations, educational institutions, and other entities that qualify under IRS guidelines as 501(c)(3) organizations.

Documentation: Donors must keep records of all contributions. For contributions of cash or property valued at $250 or more, the donor must obtain a written acknowledgment from the charity.

Special Rules for Vehicles: Donating a vehicle (car, boat, airplane) has specific rules. The deductible amount can depend on what the charity does with the vehicle.

Limits Based on AGI

Total charitable contributions are generally capped based on a percentage of the taxpayer’s AGI, depending on the type of charity and the property donated.

  1. Cash Contributions: Contributions made in cash to qualified organizations are generally deductible up to 60% of the taxpayer’s Adjusted Gross Income (AGI). If you donate more than this amount, the excess contribution can be carried forward for up to five years.
  2. Ordinary Income Property: Contributions of ordinary income property (such as inventory or other property held for sale to customers) are deductible at the lesser of fair market value or cost basis, and these deductions are subject to a 50% AGI limitation. It’s important to note that ordinary income property deductions are taken after cash contributions have been accounted for, which means that they can use up any remaining deduction space up to the 50% limit.
  3. Long-Term Capital Gains Property: Contributions of property that would have resulted in long-term capital gains if sold (property held for more than a year, like stocks or real estate) are generally deductible at fair market value, subject to a 30% AGI limitation. This category of deductions is considered after both cash contributions and ordinary income property contributions.

The interactions between these different types of contributions are where the complexity arises:

  • If you donate both cash and property in the same year, you must deduct your cash contributions first up to the 60% limit.
  • After the cash contributions, you move on to the contributions of ordinary income property. If your cash contributions did not use up all of the 50% AGI limitation space, you can then deduct the contributions of ordinary income property up to the remainder of that 50% limit.
  • Lastly, after considering cash and ordinary income property contributions, you apply the 30% AGI limitation for LTCG property. If the 50% limit for cash and ordinary income property has been reached, the LTCG property contributions may not be fully deductible in the current year. Any excess can also be carried forward for up to five years.

Additional Notes:

Charity Event Tickets: The deductible amount for charity event tickets is limited to the excess of the purchase price over the fair market value of any goods or services received in return.

Volunteer Services: While out-of-pocket expenses related to volunteer work can be deductible, the value of services provided is not.

Substantiation for Non-Cash Donations Over $5,000: For non-cash donations over $5,000, except publicly traded securities, a qualified appraisal is usually required.

Example:

If a taxpayer with an AGI of $100,000 makes a $40,000 cash donation, a $30,000 ordinary income property donation, and a $20,000 LTCG property donation:

  • The cash contribution of $40,000 is within the 60% limit ($60,000), so it’s fully deductible.
  • The ordinary income property contribution is next, but since the taxpayer has already deducted the allowed $40,000 cash contribution, this affects the 50% limit ($50,000), leaving only $10,000. Therefore, only $10,000 of the $30,000 donation is deductible this year. The remaining $20,000 can be carried forward.
  • The LTCG property contribution is considered last, and is limited to the smaller of either the remainder from the 50% threshold for cash and ordinary income property or to 30% of AGI. Since there is nothing remaining from the 50% threshold, the LTCG contribution cannot be deducted and must be carried forward to future years.

In this example, the total deductible amount for the year is $50,000 ($40,000 cash + $10,000 ordinary income property + $0 LTCG property), and there’s a carryover of $40,000 from the ordinary income property donation and the LTCG property contribution.

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