Personal Deductions

Charitable contributions

1. Under 170, charitable contributions are generally deductible

   1. Treas. Reg. Section 1.170A-1(g) states that no deduction is allowed under section 170 for a contribution of services. (Larry- donation of blood is a form of service)

   2. Rationale:

      1. Encourage taxpayers to support charitable organizations

      2. The charitable gift is seen as reducing the consumption opportunity of the donating taxpayer

   3. Matching grant: the favorable tax treatment for itemizers is a form of “matching grant”: a form of subsidy administered through the tax system

2. Amount of deduction

   1. unrealized gain: According to section 170(e), unrealized gain in donated property is deductible only if (that is, FMV can be deducted only if):

      1. The gain would have been long-term capital gain had the taxpayer sold the property;

         1. Hair would produce long term capital gain (more than one year)

         2. Blood would not because the lives of blood cells are too short

      2. In the case of a contribution of tangible personal property, the use of the property by the charity is related to the charity’s tax-exempt purpose, and

      3. The property is not given to a private foundation, a category of charities that has been singled out for special treatment in a number of respects.

         1. Rationale: In addition to violating tax logic, the deduction for unrealized appreciation encourages taxpayers to put unrealistically high values on donated property, and leads to frequent tax litigation over the value of contributed property

         2. Otherwise, you can only deduct basis.

   2. Quid pro quo

      1. Ordinarily, a charitable contributions deduction is available only for the net value that flows to the charitable target

      2. A payment of money generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return.

      3. However, a taxpayer’s payment to a charitable organization that is accompanied by his receipt of a benefit may have a dual character of a purchase and a contribution if the payment exceeds the value of the benefit received in return.

      4. Two part test:

         1. The payment is deductible only if and to the extent it exceeds the market value of the benefit received

         2. The excess payment must be made with the intention of making a gift

      5. College football exception: §170(l) - p. 442

         1. Can claim 80% contribution to an educational organization even if get some perks (like football tickets) as charitable deduction

      6. Burning down houses

         1. Donation to the fire department to burn down houses

         2. Amount of deduction is limited to the value of the old house detached from the land

         3. Reduced by quid pro quo received by the taxpayer in the form of the removal of the unwanted house from the land

3. Eligible recipient p378

   1. Section 170(c): To be deductible, a contribution must be made to an organization that is either a governmental unit, or a corporation, trust, or similar organization that is organized and operated for one of several stated charitable purposes, prominently including religious, charitable and educational purposes.

4. Limitations p378

   1. Section 170(b) in general, an individual taxpayer’s deduction for any given tax year is limited to 50 percent of the taxpayer’s contribution base, which in most cases is simply his adjusted gross income.

   2. Special rules:

      1. Gifts made to private foundations are deductible only to the extent of 30 percent of the contribution base

      2. A 30 percent limit also applies to gifts of appreciated property, the deduction is based on the fair market value of the donated property.

      3. A special 20 percent limit applies to gifts of appreciated property that are made to private foundations

   3. Any amount that are disallowed by these rules may be carried over by the taxpayer and deducted in up to five subsequent years, pursuant to the rules of section 170(d).

   4. Corporate taxpayers are subject to a different limitation: they may deduct up to 10 percent of their taxable income.

   5. For donations of barely appreciated property, can elect section 170(b)(1)(c)(iii), and subject to the 50% cap instead of the 30% cap. Can only deduct basis in this case.

Interest expenses

5. Section 163(a) says that taxpayers may deduct all interest paid or accrued within the taxable year on indebtedness.

6. Section 163(h) generally disallows interest deductions for personal interest. All interest is personal interest unless it falls within a specific statutory exception: business interest, certain amounts of home mortgage interest, investment interest, passive activity interest, and educational loan interest.

7. Basketing rule: 163(d) states that investment interest, generally, interest on debt incurred to buy investment assets, is deductible only to the extent of investment income

   1. Example 1: 5k interest, 0 investment income, 0 deduction

   2. Example2: 5k interest, 1500 dividend, 1500 deduction

   3. Example 3: 5k interest, 7k dividend, 5k deduction

8. Qualified residence interest

   1. Section 163(h)(3) taxpayers can be allowed to deduct most interest on mortgages that are secured by their personal residence.

      1. The number of personal residences whose mortgages can generate deductible interest is limited to two, with married couples who file separately being allowed only one residence each.

      2. The home in question must secure the mortgage loan the interest on which the taxpayer seeks to deduct.

      3. Mortgage loan must be acquisition indebtedness or home equity indebtedness

      4. Loan...

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