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1 [1] (November 13, 2018)

handle is hein.crs/crsmthzzbsi0001 and id is 1 raw text is: The Charitable Deduction for Individuals November 13, 2018 The charitable deduction is a long-standing feature of the individual income tax. It is also one of the largest individual income tax provisions in terms of annual forgone revenue, an estimated $58.1 billion in FY2018. However, as a result of various changes implemented by the 2017 tax revision (P.L. 115-97), the tax expenditure for charitable contributions is expected to fall to $45.1 billion for FY2019. This In Focus provides background information on the charitable deduction. Tax provisions for corporate contributions and charitable bequests are not addressed. The Deduction Under current law, taxpayers who itemize their deductions can-subject to certain limitations-deduct charitable donations to qualifying organizations. Qualifying organizations are generally public charities or private foundations with tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3); federal, state, or local governments; and other less common types of qualifying organizations. Tax-deductible donations to qualifying organizations can be in the form of cash or property. Property held for more than one year is often referred to as long-term capital gain property. Property held for less than a year is often referred to as short-term capital gain property. Depending on (1) the type of property donated and (2) the type of qualifying organization that receives the donations, there are limitations on the total dollar amount that can be deducted by the taxpayer in a given tax year. The limitations are defined as a percentage of the taxpayer's adjusted gross income, or AGI (computed without regard to net operating loss carrybacks), as noted in Table 1. If the amount deducted exceeds the taxpayer's AGI limitation, the excess can be carried forward and deducted on future years' tax returns for up to five years. For non-cash donations, there are rules on how to value the property. Depending on the type of property and the recipient organizations, the property is generally valued at its basis (i.e., what the taxpayer originally paid for the property with adjustments) or its fair market value (how much the taxpayer would receive in an open market for the property at the time it is donated), as noted in Table 1. Selected Legislative Background The charitable deduction was first enacted to offset the potential negative effects of increased income taxes on charitable giving as part of the War Income Tax Revenue Act of 1917 (P.L. 65-50). The overall amount that could be deducted was limited to 15% of net taxable income to prevent taxpayers from eliminating tax liability by claiming the deduction. The deduction has been changed dozens of times since enactment. Key legislative changes relevant to this In Focus are highlighted next. Table I. Limitations on Charitable Contributions Valuation Type of Rules for Donation Recipient Property Limit Public charity; private Basis of the 60% of operating foundation; property AGIb Cash or federal, state, local short-term government gain capital property Private non-operating Basis of the 30% of foundation; othera property AGI Public charity; private Fair market 30% of operating foundation; value AGI Long-term federal, state, local capital gain government property Private non-operating Basis of the 20% of foundation; othera property AGI Source: Internal Revenue Code (IRC) Section 170. Note: These are general rules, and there are numerous exceptions. a. Includes qualifying contributions to veterans' organizations, fraternal societies, and nonprofit cemeteries. Not all non- operating foundations are subject to the 30% limit. b. Temporarily increased from 50% to 60% through 2025. Over time, Congress has modified the maximum amount that can be deducted in a given year by changing the income limitation. In 1952, as part P.L. 82-465, Congress raised the limitation to 20% of AGI. In 1954, Congress increased the maximum deduction limit to 30% of AGI (P.L. 83-591) for donations to certain public charities. The Tax Reform Act of 1969 (P.L. 91-172) raised the deduction limit to 50% of AGI for donations to public charities and allowed deductions for contributions to private operating foundations. The 1969 act also imposed a 30% limit for contributions of appreciated property and imposed other restrictions on contributions of long-term capital gain property. The Deficit Reduction Act of 1984 (P.L. 98-369) raised the limitation on the deduction for donations of cash or short-term capital gain property to private non-operating foundations from 20% to 30% of AGI. There were exceptions to these limits for particularly large gifts. The Revenue Act of 1924 (P.L. 68-176) specified that if a taxpayer made contributions exceeding 90% of net income in the tax year and each of the past 10 years, a full deduction was allowed. A phaseout of the unlimited deduction was included in the Tax Reform Act of 1969. In the early 1980s, temporary changes provided a charitable deduction to non-itemizers. The Economic Recovery Act of 1981 (P.L. 97-34) allowed taxpayers who took the standard deduction to claim an additional deduction for charitable www.crs.gov 7-5700