Taxing Lessons Case Summaries

Case — Charitable Contributions Carryover

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TL Case Summ

THE QUESTION

Can a taxpayer choose how much of a charitable contributions carryover deduction to allocate between various tax years?

THE DISPUTE

Taxpayer Says: The charitable contributions carryover can be used as necessary as long as the carryover is deducted within the allowable five year time period following the original contribution.

Internal Revenue Service Says: A portion of the deduction expires each year whether it is actually used or not.

THE LAW

From Internal Revenue Code Section 170(a): Allows a deduction for charitable contributions made within the taxable year.

From Internal Revenue Code Section 170(b)(1)(G): A taxpayer’s contribution base is the taxpayer’s adjusted gross income calculated without regard to any net operating loss carryback under section 172.

From Internal Revenue Code Section 170(d)(1): Provides that if the amount of a  charitable contribution made to a qualified charity exceeds 50% of the taxpayer’s contribution base for that year, any excess contribution is to be treated as a charitable contribution paid in each of the five succeeding taxable years in order of time, according to a formula.

From Internal Revenue Code Section 170(d)(1)(A): Requires that the carryover contribution amount be the lesser of: (i) the amount by which 50% of the taxpayer’s contribution base for such succeeding taxable year exceeds the sum of the charitable contributions described in subsection (b)(1)(A) payment of which is made by the taxpayer within such succeeding taxable year (determined without regard to this subparagraph) and the charitable contributions described in subsection (b)(1)(A) payment of which was made in taxable years before the contribution year which are treated under this subparagraph as having been paid in such succeeding taxable year; or (ii) in the case of the first succeeding taxable year, the amount of such excess, and in the case of the second, third, fourth, or fifth succeeding taxable year, the portion of such excess not treated under this subparagraph as a charitable contribution described in subsection (b)(1)(A) paid in any taxable year intervening between the contribution year and such succeeding taxable year.

THE CAUSE OF THE DISPUTE

As a general rule, when you make cash charitable contributions of more than 50% of your adjusted gross income in a tax year, the amount you can claim as an itemized deduction is limited. Typically, you can carry the excess contributions to the succeeding five years and claim them as itemized deductions as if you made them during those years.

In this case, the taxpayer emerged from an audit of his 2002 tax return with a charitable contributions carryover of $61,150. Rather than amending his 2003 tax return, which had already been filed, the taxpayer applied arbitrary amounts of the carryover to tax returns filed in years 2004 and 2005.

The IRS disallowed all but $1,944 of the carryover to the 2005 tax year, saying the remainder should have been allocated to intervening years to the maximum extent permissible, and only the excess should have been carried forward.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 13KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!
For the IRS. The plain language of the statute and the applicable regulations dictates that some portion of the deduction expires each year whether it is actually used or not. The amount the taxpayer can deduct is limited.
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