When an individual makes a contribution to charity his tax deduction is limited to 50% of his adjusted gross income. The percentage could go down depending on the type of property contributed and the type of charity that receives the donation. Charities that have a 30% limitation include fraternal orders, war veteran organizations, cemetery companies, and certain private non-operating foundations. The deduction is also limited to 30% of adjusted gross income, when an individual contributes property that would have produced long term capital gains to a qualifying 50% charity. However, the donor can save the 50% limitation by electing to only take the amount of the basis in his property as a charitable deduction on his tax return.
In applying these rules to contributions of appreciated assets, you should keep in mind that there are also rules reducing the amount of the charitable contribution on certain specific capital gain property. This category includes tangible personal property that is unrelated to the charitable organization’s exempt function, and capital gains property other than publicly traded stock donated to certain private foundations. For these assets taxpayers are required to reduce the amount of a charitable contribution by the amount of the long term capital gains that the sale of the property would have generated.
Example: A bankruptcy lawyer donates her jewelry to her alma mater, which the college sells to help pay faculty salaries. Since the jewelry was not used in providing education, her tax deduction for the jewelry will be reduced by the capital gain she would have received, if she had instead sold the property and donated the proceeds to the school.
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