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W E AL T H P L AN N I N G
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INCOME TAX CHARTIABLE DEDUCTION SUMMARY
Tax Savings on Charitable Gifts
THE INCOME TAX CHARITABLE DEDUCTION
The United States is one of the most charitable nations in the world, as measured by the
percentage of gross domestic product that is donated for charitable causes each year. Although tax
savings is usually not the main motivation for philanthropy, donors generally expect their
charitable gifts to result in a deduction on their taxes.
Marguerite Griffin,
National Director of
Philanthropic Services
Tim Bresnahan,
Second Vice President
Philanthropic Services
American taxpayers may be eligible for an income tax charitable deduction for donations of
cash and other assets to charitable organizations in the U.S. The amount that a donor may deduct
from his/her personal income taxes depends, in part, on what the taxpayer donated and the type of
organization that received the donation. For example, donations of cash to public charities are
generally more favorable than donations of stock for the purposes of an income tax charitable
deduction.
A donor’s income tax charitable deduction is also limited by his/her adjusted gross income
(“AGI”) in a given year. For example, if a donor contributes cash to a public charity, the donor
may only deduct up to 50% of her AGI in the year she makes the donation. If she is not able to
use all of her deduction in a given year, she may be able to “carry forward” the unused portion of
the deduction for use in subsequent years (for up to five years).
November 2013
DOUBLE TAX BENEFIT
In addition to providing a potential income tax charitable deduction, donations of certain assets,
such as appreciated marketable securities, also provide a benefit to the donor in the form of
avoiding long-term capital gains. For example, when an individual sells shares of long-term
appreciated publically-traded stock, the proceeds of the sale are subject to capital gains tax.
However, if the stock owner contributes the shares to a public charity, there would be no tax due
on the transfer to charity and the charity could sell the shares without incurring taxable long-term
capital gains.
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The following chart provides a helpful overview of the income tax charitable deduction:
Transfer To
AGI Limitation
Deduction Based On
Public charity
50% for cash
Fair market value
Private foundation
30% for long-term capital
gain property
30% for cash
20% for long-term capital
gain property
Charitable remainder trust
with public charity as
remainder beneficiary
Charitable remainder trust
with private foundation as
remainder beneficiary
Supporting organization
Non-qualified charitable
trust
50% for cash
30% for long-term capital
gain property
30% for cash
Fair market value for cash and
publically traded long-term
appreciated securities; tax cost for
other long-term capital gain
property, including closely held
stock and real estate
Fair market value
50% for cash
Fair market value for cash and
publically traded long-term
appreciated securities; tax cost for
other long-term capital gain
property, including closely held
stock and real estate
Fair market value
30% for long-term capital
gain property
N/A
N/A
20% for long-term capital
gain property
When determining how and when to fund charitable giving goals, it is important to consider
charitable gifts in the context of a donor’s overall wealth management plan. Working with
advisors, such as a financial planner or accountant, to select the most strategic assets for charitable
giving helps ensure the donor’s philanthropic and financial goals are aligned.
THE PEASE AMENDEMENT AND CHARITABLE CONTRIBUTIONS
The American Taxpayer Relief Act of 2012 (“ATRA”) reinstated the reduction in the amount of
itemized deductions for certain high-income taxpayers. Otherwise known as the Pease
Amendment (named after Congressman Donald Pease who sponsored the amendment in the early
1990s), total itemized deductions are now reduced by 3 percent of the amount that a taxpayer’s
adjusted gross income (AGI) exceeds a threshold amount: a threshold AGI of $300,000 for
married taxpayers who file jointly, $275,000 for heads of households and $250,000 for single
persons (indexed for inflation annually). Up to 80% of otherwise allowable deductions (charitable
contributions, mortgage interest, and state and local income and property taxes) could be
disallowed. While some commentators have predicted that the Pease Amendment would
discourage charitable giving, an analysis of the practical effects of the limitations present a
different scenario. Moreover, research has shown that from 1991 to 2009 when the Pease
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Amendment was previously in effect, there was a negligible impact on the amount most charitable
taxpayers could deduct.
The extent of the loss of deductions is directly tied to AGI and, therefore, the impact for any
particular taxpayer requires individual analysis. For example, married taxpayers, Byron and
Nancy, have an AGI of $245,000. Their itemized deductions, including their charitable gifts, total
$50,000. Because Byron’s and Nancy’s income falls below the threshold amount at which the
Pease Amendment applies, they are not required to reduce their charitable or other deductions. In
other words, their charitable gifts remain fully deductible.
Essentially, the Pease Amendment is a tax on income that might otherwise escape income
taxation. The Pease deduction cap does not reduce the marginal value of tax deductions such as
charitable contributions. Even if a taxpayer recognizes a lower tax benefit from her charitable
contributions because of the Pease limitations, this should be balanced against the increased value
of her deductions given high income tax rates.
In summary, only a small number of taxpayers who make very large charitable gifts and have
very high incomes and/or no deductions other than charitable gifts could see a negative tax impact
from the reinstatement of the Pease Amendment.
FOR MORE INFORMATION
Wealth Planning Advisory Services at Northern Trust includes financial planning, family
education and governance, philanthropic advisory services, business owner consulting, tax
strategy and wealth transfer services.
If you’d like to learn more, contact a Northern Trust professional at a location near you or visit
us at northerntrust.com.
(c) 2014, Northern Trust Corporation. All rights reserved.
LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should
not be treated as legal advice, investment advice or tax advice. Readers, including professionals,
should under no circumstances rely upon this information as a substitute for their own research or
for obtaining specific legal or tax advice from their own counsel.
IRS CIRCULAR 230 NOTICE: To the extent that this outline or any attachment concerns tax
matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding
penalties that may be imposed by law. For more information about this notice, see
http://www.northerntrust.com/circular230.
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