Charitable contributions, taxes and medical expenses.pdf

Charitable contributions, taxes and medical expenses.pdf -...

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SECTION XVIII CHARITABLE CONTRIBUTIONS, TAXES, MEDICAL EXPENSES Suggested Analysis 1. Barbara gave $100 to a homeless family living on the street. May she take a charitable deduction for the $100? Section 170 allows for the deduction of a charitable contribution as defined in § 170(c). Section 170(c) defines a charitable contribution as a gift to certain charitable institutions. Individuals are not qualified recipients under § 170(c). Therefore, regardless of circumstances or intent, gifts made directly to needy individuals, or funds set up to aid a specific individual, are not deductible as charitable donations. 2. Joe donated 200 shares of Xerox stock to Shining Door University. He had purchased the stock four years earlier for $38,000. On the date of the contribution, the stock had a fair market value of $40,000. His adjusted gross income for the current year was $100,000. This was Joe's only charitable contribution. How much is Joe’s charitable contribution deduction with and without all available elections? Shining Door University is a permissible recipient assuming that it is a corporation created in the United States, organized and operated exclusively for educational purposes. § 170(c)(2)(B). We must determine the amount of the donation for purposes of the charitable deduction and apply the appropriate deduction percentage limitation rule. When property is donated, the amount of the donation is generally the fair market value of the property. Treas. Reg. § 1.170A-1(c)(1). There are certain exceptions to the fair market value rules when appreciated property is donated. However, none of those exceptions apply here. Thus, the full $40,000 is allowed. Note that the $2,000 inherent gain is not triggered by virtue of the donation. The charitable deduction for the fair market value is allowed without the tax on the long term capital gains ever having to be paid. This results in the donation of appreciated property often having a significantly lower after tax cost that the donation of the same amount of cash. There is, however, a downside to the donation of appreciated property with long term capital gains to be found in the percentage limitation rule. Under § 170(b)(1)(A)(ii), an individual’s charitable deduction is generally limited to
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50% of “contribution base” for the taxable year. The contribution base is defined in § 170(b)(1)(G) as adjusted gross income computed without regard to any net operating loss carryback. Thus, under the general rule (if it applies), Joe would be entitled to claim a charitable donation equal to the lesser of his actual donations or 50% of his AGI of $100,000 or $50,000. There are exceptions to the 50% limitation general rule. First, any charitable contribution not described in § 170(b)(1)(A) is limited to 30% of the contribution base. § 170(b)(1)(B) Second, § 170(b)(1)(C)(i) provides that even if the property is described in § 170(b)(1)(A) it may nevertheless subject to the 30% contribution percentage limitation. This rule applies to donated “capital gain property,” which is property with inherent long term capital gains, unless § 170(e)(1)(B) applies to the contribution.
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