Charitable Contributions A gift to anything that qualifies as a “charitable” recipient generally is deductible on one’s income tax return. Charitable recipients include: The United States, any state or any political subdivision thereof Any charitable corporation, trust, etc., operated exclusively for any of the following purposes: Religious Scientific Literary Educational Fraternal order or lodge Organization of war veterans, non-profit cemetery Federal Income Taxation Lecture 8

Charitable Contributions (continued) Recipients of charitable donations can be: A tax-exempt organization that is allowed under section 501(c) of the IRC and has been granted tax exempt status by the IRS; OR A trust or foundation that, under its terms, may only distribute assets to a 501(c) organization. The value of anything received in return for the donation cannot be deducted. Also, if the charitable organization will do something that gives the donor “substantial benefit,” the value of that benefit cannot be deducted. Fixed payments to a church or similar organization are deductible, even if they are “membership dues” etc. Federal Income Taxation Lecture 8

Limits on the Charitable Deduction For an individual, the charitable deduction is limited to 50% of his or her taxable income in a given year. For a corporation, the charitable deduction is limited to 10% of the corporation’s taxable income. Donors of appreciated property can deduct the value of the property without even having to realize a capital gain! HOWEVER, If the sale of the asset would be income or a short term capital gain then- you can only deduct your adjusted basis In some other cases, the deduction is limited to the adjusted basis If the donation is of any appreciated asset (that would be a capital gain if sold), the deduction is limited to 30% of one’s income per year. Beware of accuracy-related penalties based on overvaluations New rules make is much tougher to donate a car for a write-off Federal Income Taxation Lecture 8

Donations to Charitable Trusts Any donation to charitable trust, which, by its terms, must give all of its assets to 501(c) organizations, is deductible as a charitable gift. A contribution to a Charitable Lead Trust (a trust that gives a certain percentage or amount to charity every year but later goes back to the donor or his heirs) allows a deduction now for the present value of the charities’ interests. A contribution to a Charitable Remainder Trust (a trust that gives a certain percentage or amount to the donor or another private person every year but gives a remainder interest to charity) allows a deduction now for the present value of the charities’ remainder interest. Federal Income Taxation Lecture 8

Deductible Interest Payments Interest on business loans (i.e., any loan taken out by a business for business purposes or by an individual for funds necessary to run a business) are fully deductible as a regular business expense. Personal interest (such as credit card interest) is generally not deductible but some are (such as student loan interest). Interest on a “qualified residence” is deductible, which includes: Acquisition indebtedness (i.e., a mortgage on a home), up to $1,000,000 Interest on a home equity line of credit, up to $100,000; and the total indebtedness cannot exceed the market value of the home Loan origination fees and points on a mortgage are also deductible Federal Income Taxation Lecture 8

Deduction for State and Local Taxes Income tax paid to a state is deductible on the federal return. People can choose instead to deduct sales tax paid by the state. This option is most often used by people living in states with no income tax. If one chooses to deduct sales tax, one can prove exactly how much sales tax one paid, or one can use an IRS guesstimate of how much sales tax one paid (there are tables that list these) Local taxes, including property tax, school tax, town and village taxes, etc., are all deductible on one’s federal return. Federal Income Taxation Lecture 8