60% of AGI Deduction Limit on Cash Gifts More Complicated than Many Realize

Among the many changes wrought by the tax law passed at the end of 2017, one welcomed by the charitable community was the increase in the deduction limit on gifts of cash to public charities from 50% of a donor’s adjusted gross income (AGI) to 60%. We have read this section of the new law carefully and determined that the application of the 60% limit is more complicated – and, well, limited – than many realize. We lay out below how we understand the 60% limit should be applied and how it interacts with the 30% and 50% limits.

Interaction of 30%, 50%, and 60% Gifts to Public Charities

Our reading of the new law is that cash contributions reduce, dollar for dollar, the limit on 50% deductions taken in the same tax year, whether current gifts or carryforward. Sec. 11023(a)(G)(iii)(II). Cash contributions also reduce the 50% limit when considering the 30% limit on deductions for gifts of long term appreciated property. The result is that the only way a donor can deduct more than 50% of her AGI in charitable contributions is if the contributions deducted have been made entirely with cash. As a reminder, the 50% limit still applies to deductions from contributions of short term gain and ordinary income property. It also applies when a donor elects to deduct basis on a gift of long term gain property.

Examples

1. If a donor has an AGI of $100,000 and makes $40,000 of cash contributions and $20,000 of long term appreciated property contributions, the donor can deduct all $40,000 of her cash contributions, but only $10,000 of her long term appreciated property contributions. Her deduction for long term appreciated property contributions is limited to $10,000 because the 50% of AGI limit within which the 30% of AGI limit is applied has been reduced to $10,000 by her $40,000 in cash contributions ($50,000 - $40,000 = $10,000). Her total deductions will be $50,000 and she’ll carry forward $10,000 of 30% long term gain contribution.
2. If the same donor makes $60,000 of cash contributions and $20,000 of long term appreciated property contributions, she can deduct all $60,000 of her cash contributions, but $0 of her long term appreciated property contributions because her 50% limit has been reduced to $0 by her $60,000 in cash contributions. Her total deduction would be $60,000 and she would carry forward $20,000 in 30% long term gain contributions.

Interaction of Deductions for Gifts to Public Charities and Private Foundations

The 50% of AGI limit on contributions to public charities coordinates with the 30% of AGI limit on contributions to private foundations, a category that includes grantor charitable lead trusts, in a different way. In that situation, the 30% limit on contributions to private foundations is reduced to the extent the public charity contributions exceed 20%. Only after that is the reduction in the 30% private foundation limit dollar for dollar. Cash contributions under the new 60% limit are lumped in with other public charity contributions for this purpose.

Example

If a donor with an AGI of $100,000 makes $10,000 in cash contributions and $20,000 in non-cash contributions to public charities and $30,000 in cash contributions to a private foundation, only $20,000 of the cash contributions to the private foundation would be deductible in the year of gift. This is because the total contributions to public charities ($30,000) exceeds 20% of the donor’s AGI ($20,000) by $10,000, thereby reducing the donor’s 30% limit on cash gifts to private foundations from $30,000 to $20,000. The donor would have to carry forward the remaining $10,000 of cash contributions to the private foundation.

Carryforward from 2017 and Earlier

With regard to cash contributions to public charities from 2017 and earlier years that are carried forward into 2018 and later years, they continue to count toward the 50% limit and do not count toward the new 60% limit. Cash contributions to public charities carried forward during the 2018 to 2025 period into 2026 and later years go back into the 50% limit if the new 60% limit is not extended beyond its current expiration date of 12/31/2025.

Parting Words

Yes, this system is now even more complicated and confusing than it already was. The above is based on our reading of the new rules. It is subject to revision based on the issuance of new Treasury Regulations or IRS guidance. We are hopeful that IRS Publication 526, which covers how to report charitable contributions on the federal income tax return, will be updated for the 2018 tax year with information that clarifies how the 60% limit should be applied. Unfortunately, IRS Publication 526 for 2018 is not yet available.

Update: Publication 526 for 2018 Confirms Cash Gifts Reduce 50% Limit

In Publication 526 for the 2018 tax year, the IRS confirms that cash contributions subject to the 60% of AGI limitation reduce the 50% of AGI limitation, dollar-for-dollar, as described above. Publication 526 includes the following language:

Noncash contributions to 50% limit organizations.

If you make noncash contributions to organizations described earlier under First category of qualified organizations (50% limit organizations), your deduction for the noncash contributions is limited to 50% of your adjusted gross income minus your cash contributions subject to the 60% limit.