Wealth Planning Law Group’s month-long blog series on charitable estate planning continues with a look at the limitations of income tax deductibility on charitable giving.

As we discussed in our previous blog on charitable estate planning, an outright gift is one of the simplest forms of charitable giving. This type of giving occurs when an individual selects the organizations he or she wishes to donate to, and then either 1) transfers the property during their lifetime (and received an income tax or gift tax deduction), or 2) they make a specific gift in their will or trust (and receives an estate tax deduction).

For donations made or assets transferred during a person’s lifetime, there are two types of limitations to deductibility on income tax. The first is a percentage limitation. This pertains to the amount that an individual may claim as a charitable deduction against his or her gross income in any tax year. The maximum that an individual may claim is 50% of adjusted gross income (AGI) without regard to any net operating loss carry-back for the year (also known as their contribution base). Deductions for contributions to other types of charitable organizations, such as private non-operating foundations, are limited to 30% of a person’s contribution base.

A second type of limitation to deductibility on income tax is valuation limitation, which is related to the value of the asset contributed. For Ordinary Income Property, the amount of contribution for which an individual may claim a charitable deduction generally is limited to the cost of the property – not its fair market value. This applies regardless of whether the done is a private charity or a private foundation. For Capital Gain Property, if the contribution is donated to a public charity, then the capital gain property is deductible up to the property’s fair market value. If the contribution is donated to a private foundation, the capital gain property is deductible only up to the donor’s income tax basis in the property. Unless, that is, that the property is qualified appreciated stock – in which case, the property is deductible up to fair market value.

Charitable Estate Planning is an excellent tool for building a philanthropic legacy while protecting the wealth you have worked so hard for. It can also help you save on income, estate, and other taxes – however, there are limitations to that deductibility. The process of charitable planning can be complex and may lead to serious financial problems if improperly executed. If you are interested in enlisting the help of board-certified experts in estate planning, contact Wealth Planning Law Group at (504) 608-3174 or info@lawealthplan.com.