Church Gift Deduction Rules – Part I

Are you considering making a gift to your church? If so, you need to be aware of a number of factors, some of which are new as a result of the Pension Protection Act of 2006. In summary, they are:

• IRS approved charities.
• Allowable income tax deductions for various categories of gifts.
• The substantiation of value rules for each type of property given.
• The penalties for overvaluation.
• How to deliver the gift and when it is deemed a completed gift.

In this post, I will cover the deduction allowed for the most common categories of gifts. In a follow up post, I’ll go over the treatment of less common gifts.

Cash

This is the most straightforward. Whatever you give, you can deduct. However, each category of gift has its own limitation based on your adjusted gross income (AGI) and the type of charity (public or private family foundations). The limit for cash contributions to a public charity is 50% of AGI. Churches are public charities.

Stocks, Bonds, Real Estate

If the asset has been held for more than a year, the deduction is the fair market value. However, for real estate, there are some situations that may limit the deduction to the cost basis.

If the asset has been held for less than a year, it would produce ordinary income, not a capital gain, if sold. Therefore, the deduction is limited to the cost basis. Other examples of deductions limited to the cost basis are works of art donated by the artist and inventory.

As an example of a gift of inventory, my church has an annual shoe drive to benefit children. If the owner of a shoe store donated 50 pairs of shoes, the deduction would be limited to the cost basis, not the retail price.

Series E and EE Bonds

Series E bonds cannot be transferred to a charity during the owner’s lifetime. You would first have to cash in the bonds, pay the tax on the gain (which has been deferred similar to an annuity) and then contribute whatever is left over.

Planes, Trains and Automobiles

There are new rules, which became effective January 1, 2005.

If the charity doesn’t have a use for the donated vehicle and sells it, the deduction is whatever they get for it or the fair market value, if lower. However, if the charity fixes it up, uses it or plans on giving the vehicle to a needy person, you can deduct the fair market value.

Disclaimer

Bear in mind, I am not a tax authority. Before you make any gift, you should consult with a qualified tax professional. Furthermore, some gifts may not be acceptable to the church or have to pass through a review process (life insurance is a good example). Therefore, in these situations bring the church into the gifting process early on as well.