Deductions

A deduction is permitted for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Examples of deductible business expenses include: (1) expenditures for reasonable salaries, (2) traveling expenses (within limits), and (3) certain rental expenses incurred for purposes of a trade or business. Illegal payments made in the course of business, such as bribes to government officials or illegal rebates, are not deductible. Under the 2017 Tax Act, certain expenses paid to (or at the direction of) a government or government entity in relation to the violation of any law, or investigation into potential violations of the law, are not deductible. Further, amounts paid in relation to sexual harassment suits that are subject to a nondisclosure agreement are not deductible.

<div class="Section1">Generally, IRD must be included in the gross income of the recipient; however, a deduction is normally permitted for estate and generation-skipping transfer taxes paid on the income. The amount of the total deduction is determined by computing the federal estate tax (or generation-skipping transfer tax) with the net IRD included and then recomputing the tax with the net IRD excluded. The difference in the two results is the amount of the income tax deduction. However, if two or more persons receive IRD of the same decedent, each recipient is entitled to only a proportional share of the income tax deduction. Similarly, if the IRD is received over more than one taxable year, only a proportional part of the deduction is allowable each year. Where the income would have been ordinary income in the hands of the decedent, the deduction is an itemized deduction.<a href="#_ftn1" name="_ftnref1">¹</a> The recipient does not receive a stepped up basis (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="692">692</a>).<a href="#_ftn2" name="_ftnref2">²</a> A beneficiary was allowed to claim a deduction for IRD attributable to annuity payments that had been received even though the estate tax had not yet been paid.<a href="#_ftn3" name="_ftnref3">³</a><div class="Section1"><br /> <br /> In technical advice, the IRS stated that the value of a decedent&rsquo;s IRA should not be discounted for estate tax purposes to reflect income taxes that will be payable by the beneficiaries upon receipt of distributions from the IRAs or for lack of marketability. The Service reasoned that the deduction is a statutory remedy for the adverse income tax impact and makes any valuation discount inappropriate if the deduction applies.<a href="#_ftn4" name="_ftnref4">⁴</a> Courts have likewise denied discounts for lack of marketability.<a href="#_ftn5" name="_ftnref5">⁵</a> The Service also determined that a deduction claimed on a decedent&rsquo;s estate tax return &ndash; which represented income taxes paid by the estate on the estate&rsquo;s income tax return, which in turn were triggered by the amount distributed to the estate from the decedent&rsquo;s IRAs &ndash; was not allowable as a deduction under IRC Section 2053. According to the Service, even if the estate had not claimed the IRD deduction, the income taxes paid on the distributions from the IRAs would still not be deductible under IRC Section 2053 because any additional benefit beyond what Congress had intended would be unwarranted.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The Service has ruled that if the owner-annuitant of a deferred annuity contract dies <em>before</em> the annuity starting date, and the beneficiary receives a death benefit under the annuity contract, the amount received by the beneficiary in a lump sum in excess of the owner-annuitant&rsquo;s investment in the contract is includible in the beneficiary&rsquo;s gross income as IRD. If the death benefit is instead received in the form of a series of periodic payments, the amounts received are likewise includible in the beneficiary&rsquo;s gross income in an amount determined under IRC Section 72 as IRD.<a href="#_ftn7" name="_ftnref7">⁷</a> See, e.g., Let. Rul. 200537019 (where the Service ruled that the amount equal to the excess of the contract&rsquo;s value over the decedent&rsquo;s basis, which would be received by the estate as the named beneficiary of the contract upon surrender of the contract, would constitute IRD includible by the estate in its gross income; however, the estate would be entitled to a deduction for the amounts of IRD paid to charities in the taxable year, or for the remaining amounts of IRD that would be set aside for charitable purposes).<br /> <br /> In <em>Estate of Kahn</em>,<a href="#_ftn8" name="_ftnref8">⁸</a> the Tax Court held that in computing the gross estate value, the value of the assets held in the IRAs is not reduced by the anticipated income tax liability following the distribution of IRAs, in part because IRC Section 691(c) addresses the potential double tax issue. The Tax Court further held that a discount for lack of marketability is not warranted because the assets in the IRAs are publicly traded securities. Payment of the tax upon distribution is not a prerequisite to making the assets in the IRA marketable; consequently there is no basis for the discount. In technical advice the Service has also determined that a discount for lack of marketability is not available to an estate where the deduction for IRD is available to mitigate the potential income tax liability triggered by the IRD assets.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 691(c); Rev. Rul. 78-203, 1978-1 CB 199.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;IRC &sect; 1014(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;FSA 200011023.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;TAM 200247001; <em><em>see also</em></em> TAM 200303010.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;<em>Estate of Smith v. U.S.</em>, 300 F. Supp. 2d 474 (S.D. TX 2004), <em>appeal docketed</em>, No. 04-20194 (5th Cir. 2004); <em>Estate of Robinson v. Commissioner</em>, 69 TC 222 (1977).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;Let. Rul. 200444021.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;Rev. Rul. 2005-30, 2005-20 IRB 1015.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;125 TC 227 (2005).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;TAM 200247001; <em><em>see also</em></em> TAM 200303010.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A sole proprietor who purchases health insurance in his individual name has established a plan providing medical care coverage with respect to his trade or business, and therefore may deduct the medical care insurance costs for himself, his spouse, and dependents under IRC Section 162(l), but only to the extent the cost of the insurance does not exceed the earned income derived by the sole proprietor from the specific trade or business with respect to which the insurance was purchased.<br /> <br /> A self-employed individual may deduct the medical care insurance costs for himself and his spouse and dependents under a health insurance plan established for his trade or business up to the net earnings of the specific trade or business with respect to which the plan is established, but a self-employed individual may not add the net profits from all his trades and businesses for purposes of determining the deduction limit under IRC Section 162(l)(2)(A). However, if a self-employed individual has more than one trade or business, he may deduct the medical care insurance costs of the self-employed individual and his spouse and dependents under each specific health insurance plan established under each specific business up to the net earnings of that specific trade or business.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In a legal memorandum, the IRS ruled that a self-employed individual may not deduct the costs of health insurance on Schedule C. The deduction under IRC section 162(l) must be claimed as an adjustment to gross income on the front of Form 1040.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. CCA 200524001.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. CCA 200623001.<br /> <br /> </div>

<div class="Section1">&ldquo;Income in respect of a decedent&rdquo; (IRD) refers to those amounts to which a decedent was entitled as gross income, but that were not includable in his taxable income for the year of his death.<a href="#_ftn1" name="_ftnref1">¹</a> It can include, for example: renewal commissions of a sales representative; payment for services rendered before death or under a deferred compensation agreement; and proceeds from sales on the installment method (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="667">667</a>). Generally, if stock is acquired in an S corporation from a decedent, the pro rata share of any income of the corporation that would have been IRD if that item had been acquired directly from the decedent is IRD.<a href="#_ftn2" name="_ftnref2">²</a><div></div><div>The IRS has determined that a distribution from a qualified plan of the balance as of the employee&rsquo;s death is IRD.<a href="#_ftn3" name="_ftnref3">³</a> The Service has also privately ruled that a distribution from a 403(b) tax sheltered annuity is IRD.<a href="#_ftn4" name="_ftnref4">⁴</a> The Service has also concluded that a death benefit paid to beneficiaries from a deferred variable annuity would be IRD to the extent that the death benefit exceeded the owner&rsquo;s investment in the contract.<a href="#_ftn5" name="_ftnref5">⁵</a> In addition, the Service has determined that distributions from a decedent&rsquo;s individual retirement account were IRD, including those parts of the distributions used to satisfy the decedent&rsquo;s estate tax obligation, since the individual retirement account was found to have automatically vested in the beneficiaries.<a href="#_ftn6" name="_ftnref6">⁶</a></div><div class="Section1"><br /> <br /> However, a rollover of funds from a decedent&rsquo;s IRA to a marital trust and then to the surviving spouse&rsquo;s IRA was not IRD, according to the Service, where the surviving spouse was the sole trustee and sole beneficiary of the trust.<a href="#_ftn7" name="_ftnref7">⁷</a> The Service also ruled that designation of a QTIP trust as the beneficiary of a decedent&rsquo;s account balance in a qualified profit sharing plan would not result in the acceleration of IRD at the time the assets from the plan passed into the trust. Consequently, the taxpayer would include the amounts of IRD in the plan in the taxpayer&rsquo;s gross income only when the taxpayer received a distribution (or distributions) from the trust.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Gain realized upon the cancellation at death of a note payable to a decedent has been held to be IRD to the decedent&rsquo;s estate.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The unreported increase in value reflected in the redemption value of savings bonds as of the date of a decedent&rsquo;s death constitutes income in respect of a decedent.<a href="#_ftn10" name="_ftnref10">¹⁰</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7688">7688</a>. If savings bonds on which the increases in value have not been reported are inherited, or the subject of a bequest, the reporting of such amounts may be delayed until the bonds are redeemed or disposed of by the legatee, or reach maturity, whichever is first.<a href="#_ftn11" name="_ftnref11">¹¹</a> However, to the extent savings bonds are distributed by an estate or trust to satisfy <em>pecuniary</em> obligations or legacies, the estate or trust is required to recognize the unreported incremental increase in the redemption price of Series E bonds as income in respect of a decedent.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> The Service determined that in the case of a taxpayer who dies before a short sale of stock is closed, any income that may result from the closing of the short sale is not IRD, and the basis of any stock held on the date of the taxpayer&rsquo;s death will be stepped up.<a href="#_ftn13" name="_ftnref13">¹³</a> The Service also privately ruled that in the case of a sales contract entered into before the decedent&rsquo;s death, where an economically material contingency existed at the time of the decedent&rsquo;s death that might have disrupted the sale of the real property, any gain realized from the sale of the real property after the decedent&rsquo;s death did not constitute IRD.<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> The Court of Appeals for the 10th Circuit has held that an alimony arrearage paid to the estate of a former spouse was IRD and thus, taxable to the recipient beneficiaries as ordinary income.<a href="#_ftn15" name="_ftnref15">¹⁵</a><br /> <br /> The Tax Court determined that because a signed withdrawal request from the decedent constituted an effective exercise of the decedent&rsquo;s right to a lump-sum distribution during his lifetime, the lump-sum distribution from TIAA-CREF was therefore income to the decedent and properly includable in the decedent&rsquo;s income. Accordingly, the court held, the lump sum payment received by the decedent&rsquo;s son was not a death benefits payment and, thus, was not includable in the son&rsquo;s gross income as IRD.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;IRC &sect; 691(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;IRC &sect; 1367(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;Rev. Rul. 69-297, 1969-1 CB 131; Rev. Rul. 75-125, 1975-1 CB 254.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;Let. Rul. 9031046.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;Let. Rul. 200041018.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;Let. Rul. 9132021. <em><em>See</em></em> Rev. Rul. 92-47, 1992-1 CB 198. <em><em>See also</em></em> Let. Rul. 200336020.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp;&nbsp;Let. Rul. 200023030.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp;&nbsp;Let. Rul. 200702007.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp;&nbsp;<em>Estate of Frane v. Commissioner</em>, 998 F.2d 567 (8th Cir. 1993).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;Rev. Rul. 64-104, 1964-1 CB 223.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;Let. Ruls. 9845026, 9507008, 9024016.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;Let. Rul. 9507008.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;Let. Rul. 9436017. <em><em>See</em></em> IRC &sect; 1014.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;Let. Rul. 200744001.<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;<em>Kitch v. Commissioner</em>, 103 F. 3d 104, 97-1 USTC &para;&nbsp;50,124 (10th Cir. 1996).<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp; <em>Eberly v. Commissioner,</em> TC Summary Op. 2006-45.<br /> <br /> </div></div><br />

<p><em>Editor's Note:</em> The 2017 TCJA limited the mortgage interest deduction to $750,000, so that only interest on up to $750,000 of new mortgage debt may be deducted. This limit applies to debt incurred after December 31, 2017.<a href="#_ftn1">¹</a> The 2025 OBBB made the reduced limitation permanent (<i>see</i> Q 738).<a href="#_ftn2">²</a> Modifications to the deductibility of business interest are discussed in Q 735 to Q 737. </p><p> Late in 2015, Congress acted to extend the treatment of certain mortgage insurance premiums as qualified residence interest, as discussed below, through 2016. This treatment was extended through 2017 by the Bipartisan Budget Act of 2018, again through 2020 by the SECURE Act and through 2021 by CAA 2021. The 2025 OBBB made this treatment permanent.</p><p> The deductibility of interest depends on its classification, as described below. Furthermore, interest expense that is deductible under the rules below may be subject to the additional limitation on itemized deductions (unless it is investment interest, which is not subject to that provision). Interest must be classified and is deductible within the following limitations: <br/>(1) <em>Investment interest.</em> This includes any interest expense on indebtedness properly allocable to property held for investment.<a href="#_ftn3">³</a> Generally, investment interest is deductible only to the extent of investment income; however, investment interest in excess of investment income may be carried over to succeeding tax years. For purposes of this calculation, net long-term capital gain income is included in investment income if the taxpayer foregoes the reduced tax rate (0 percent/15 percent/20 percent) that applies to such income. Under JGTRRA 2003, as extended by ATRA, certain dividends are taxable at the lower capital gains rates rather than at higher ordinary income tax rates. A dividend will be treated as investment income for purposes of determining the amount of deductible investment interest income only if the taxpayer elects to treat the dividend as <em>not</em> being eligible for the reduced rates.<a href="#_ftn4">⁴</a> For the temporary regulations relating to an election that may be made by noncorporate taxpayers to treat qualified dividend income as investment income for purposes of calculating the deduction for investment interest, see Treasury Regulation Section 1.163(d)-1.<a href="#_ftn5">⁵</a> Note that the 2017 tax reform legislation placed limitations on the deductibility of business interest, which specifically excludes investment interest.</p><p>(2) <em>Trade or business interest.</em> This includes any interest incurred in the conduct of a trade or business. Generally, such interest was deductible as a business expense prior to 2018. See Q for a discussion of the treatment of corporate business interest under the 2017 tax reform legislation. Q and Q outline the new rules as they apply to pass-through entities.<a href="#_ftn6">⁶</a></p><p>(3) <em>Qualified residence (mortgage) interest</em>. Qualified residence interest is interest paid or accrued during the taxable year on debt that is secured by the taxpayer's qualified residence and that is either (a) "acquisition indebtedness" (that is, debt incurred to acquire, construct or substantially improve the qualified residence, or any refinancing of such debt), or (b) "home equity indebtedness" (any other indebtedness secured by the qualified residence). There is a limitation of $750,000 ($1 million prior to 2018) on the aggregate amount of debt that may be treated as acquisition indebtedness, <em>but</em> the amount of refinanced debt that may be treated as acquisition indebtedness is limited to the amount of debt being refinanced. Prior to 2018, a deduction was generally allowed for home equity indebtedness. The aggregate amount that could be treated as "home equity indebtedness" (that is, borrowing against the fair market value of the home less the acquisition indebtedness, or refinancing to borrow against the "equity" in the home) was $100,000.<a href="#_ftn7">⁷</a> Indebtedness incurred on or before October 13, 1987 (and limited refinancing of it) that is secured by a qualified residence is considered acquisition indebtedness. This pre-October 14, 1987 indebtedness is not subject to the $750,000 aggregate limit, but is included in the aggregate limit as it applies to indebtedness incurred after October 13, 1987.<a href="#_ftn8">⁸</a> (For 2007 through 2021, , and once again beginning in 2026, certain mortgage premiums are treated as qualified residence interest.)<a href="#_ftn9">⁹</a></p><p><hr></hr></p><p> <strong>Planning Point:</strong> Although interest on home equity indebtedness is technically no longer deductible under the terms of the 2017 tax reform legislation (as made permanent under the 2025 OBBB), the IRS released guidance on situations where this interest may continue to be deducted. Pursuant to the guidance, interest on home equity loans that are used to buy, build or substantially improve the taxpayer's home continue to be deductible to the extent that they (when combined with other relevant loans) do not exceed the $750,000 limit. However, home equity loan interest is not deductible to the extent that the loan proceeds are used for expenditures not related to buying, building or substantially improving a home (i.e., if the proceeds are used for personal living expenses or to purchase a new car, the related interest is not deductible). The home equity loan must be secured by the home in order for the interest to be deductible in any case. </p><p><hr></hr><br/>A "qualified residence" is the taxpayer's principal residence and one other residence that the taxpayer (a) used during the year for personal purposes more than fourteen days or, if greater, more than 10 percent of the number of days it was rented at a fair rental value, or (b) used as a residence but did not rent during the year.<a href="#_ftn10">¹⁰</a></p><p>Subject to the above limitations, qualified residence interest is deductible. If indebtedness used to purchase a residence is secured by property other than the residence, the interest incurred on it is not residential interest but is personal interest.<a href="#_ftn11">¹¹</a> The Tax Court denied a deduction for mortgage interest to individuals renting a home under a lease with an option to purchase the property. Although the house was their principal residence, they did not have legal or equitable title to the home and the earnest money did not provide ownership status.<a href="#_ftn12">¹²</a> An individual member of a homeowner's association was denied a deduction for interest paid by the association on a common building because the member was not the party primarily responsible for repaying the loan and the member's principal residence was not the specific security for the loan.<a href="#_ftn13">¹³</a> Assuming that the loan was otherwise a bona fide debt, a taxpayer could deduct interest paid on a mortgage loan from his qualified plan, even though the amount by which the loan exceeded the $50,000 limit of IRC Section 72(p) was deemed to be a taxable distribution.<a href="#_ftn14">¹⁴</a> See Q for a more detailed discussion of how the mortgage interest deduction was changed by the 2017 tax reform legislation.</p><p>(4) <em>Interest taken into account in computing income or loss from a passive activity.</em> A passive activity is generally an activity that involves the conduct of a trade or business but in which the taxpayer does not materially participate, or any rental activity.<a href="#_ftn15">¹⁵</a></p><p>(5) <em>Interest on extended payments of estate tax.</em> Generally, this interest is deductible.</p><p>(6) <em>Interest on education loans.</em> An above-the-line deduction is available to certain taxpayers for interest paid on a "qualified education loan."<a href="#_ftn16">¹⁶</a> The deduction is subject to a limitation of $2,500. The deduction is phased out for 2015-2018, ratably for taxpayers with modified AGI that exceeds certain limits.<a href="#_ftn17">¹⁷</a> Certain other requirements must be met for the deduction to be available.<a href="#_ftn18">¹⁸</a> In 2019-2021, the phaseout range is $70,000 and $85,000 for single filers and $140,000 and $170,000 for joint returns.<a href="#_ftn19">¹⁹</a> In 2022, the phaseout range was $70,000 and $85,000 for single filers and $145,000 and $175,000 for joint returns.<a href="#_ftn20">²⁰</a> In 2023, the phaseout range was $75,000 and $90,000 for single filers and $155,000 and $185,000 for joint returns.<a href="#_ftn21">²¹</a> In 2024, the phaseout range was $80,000 and $95,000 for single filers and $165,000 and $195,000 for joint returns.<a href="#_ftn22">²²</a> In 2025, the phaseout range was $85,000 to $100,000 for single filers and $170,000 to $200,000 for joint returns.<a href="#_ftn23">²³</a>In 2026, the phaseout range was $85,000 to $100,000 for single filers and $175,000 to $205,000 for joint returns.</p><p>(7) <em>Personal interest.</em> This is any interest expense not described in (1) through (6) above and is often referred to as "consumer" interest.<a href="#_ftn24">²⁴</a> Personal interest includes interest on indebtedness properly allocable to the purchase of consumer items and interest on tax deficiencies. Personal interest is not deductible.<a href="#_ftn25">²⁵</a></p><p> The proper allocation of interest generally depends on the use to which the loan proceeds are put, except in the case of qualified residence interest (excluding home equity interest, where the use is relevant post-TCJA and OBBB). Detailed rules for classifying interest by tracing the use of loan proceeds are contained in temporary regulations.<a href="#_ftn26">²⁶</a> The interest allocation rules apply to interest expense that would otherwise be deductible.<a href="#_ftn26">²⁷</a></p><p> Various provisions in the Code may prohibit or delay the deduction of certain types of interest expense. For example, no deduction is allowed for interest paid on a loan used to buy or carry tax-exempt securities or, under certain conditions, for interest on a loan used to purchase or carry a life insurance or annuity contract (see Q <a href="javascript:void(0)">3</a>). </p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 163(h)(3)(F). </p><p> <a href="#_ftnref2">2</a>. IRC § 163(h)(3)(F)(ii). </p><p> <a href="#_ftnref3">3</a>. IRC § 163(d)(3). </p><p> <a href="#_ftnref4">4</a>. IRC §§ 1(h)(11)(D)(i), as amended by ATRA, 163(d)(4)(B). </p><p> <a href="#_ftnref5">5</a>. 69 Fed. Reg. 47364 (8-5-2004). <em><em>See also</em></em> 70 Fed. Reg. 13100 (3-18-2005). </p><p> <a href="#_ftnref6">6</a>. IRC § 162. </p><p> <a href="#_ftnref7">7</a>. IRC § 163(h)(3). </p><p> <a href="#_ftnref8">8</a>. IRC § 163(h)(3)(D). </p><p> <a href="#_ftnref9">9</a>. IRC § 163(h)(3)(E), as amended by ATRA. </p><p> <a href="#_ftnref10">10</a>. IRC § 163(h)(4)(A). <em><em>See, e.g.</em></em>, FSA 200137033. </p><p> <a href="#_ftnref11">11</a>. Let. Ruls. 8743063 and 8742025. </p><p> <a href="#_ftnref12">12</a>. <em>Blanche v. Commissioner</em>, TC Memo 2001-63, <em>aff'd without opinion</em>, 2002 U.S. App. LEXIS 6379 (5th Cir. 2002). </p><p> <a href="#_ftnref13">13</a>. Let. Rul 200029018. </p><p> <a href="#_ftnref14">14</a>. FSA 200047022. </p><p> <a href="#_ftnref15">15</a>. IRC §§ 163(d), 469(c). </p><p> <a href="#_ftnref16">16</a>. IRC §§ 163(h)(2)(F), 221. </p><p> <a href="#_ftnref17">17</a>. IRC § 221(b); Rev. Proc. 2016-55, Rev. Proc. 2017-58. </p><p> <a href="#_ftnref18">18</a>. IRC § 221; Treas. Reg. § 1.221-1. </p><p> <a href="#_ftnref19">19</a> Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45. </p><p> <a href="#_ftnref20">20</a> Rev. Proc. 2021-45. </p><p> <a href="#_ftnref21">21</a> Rev. Proc. 2022-38. </p><p> <a href="#_ftnref22">22</a> Rev. Proc. 2023-34. </p><p> <a href="#_ftnref23">23</a>. Rev. Proc. 2024-40. </p><p> <a href="#_ftnref24">24</a>. IRC § 163(h)(2). </p><p> <a href="#_ftnref25">25</a>. IRC § 163(h)(1). </p><p> <a href="#_ftnref26">26</a>. Temp. Treas. Reg. § 1.163-8T. </p><p> <a href="#_ftnref26">27</a>. Temp. Treas. Reg. § 1.163-8T(m)(2). </p>

<div class="Section1"><em>Editor&rsquo;s Note 1:</em> The 2017 tax reform legislation increased the 50 percent AGI limit on contributions to public charities and certain private foundations to 60 percent for tax years beginning after 2017 and before 2026.<div></div><div><em>Editor&rsquo;s Note 2:</em> The 2020 CARES Act made several changes designed to encourage charitable giving during the COVID-19 outbreak. For the 2020 and 2021 tax years, the CARES Act amended IRC Section 62(a), allowing taxpayers to reduce adjusted gross income (AGI) by $300 worth of charitable contributions made in 2020 and 2021 even if they do not itemize.<a href="#_ftn1" name="_ftnref1">¹</a> The year-end stimulus package passed in December 2020 extended this temporary relief through 2021.</div><div class="Section1"><br /> <br /> The CARES Act also lifted the 60 percent AGI limit for 2020. This relief was also extended through 2021. Cash contributions to public charities and certain private foundations in 2020 were not subject to the AGI limit (contributions to donor advised funds, supporting organizations and private grant-making organizations remained subject to the usual AGI limits). Individual taxpayers can offset their income for 2020 up to the full amount of their AGI, and additional charitable contributions can be carried over to offset income in a later year (the amounts are not refundable). The corporate AGI limit was raised from 10 percent to 25 percent (excess contributions also carry over to subsequent tax years). Taxpayers must elect this treatment.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <em>Fifty percent limit (60 percent for tax years 2018-2025)</em>. An individual is allowed a charitable deduction of up to 50 (or 60) percent of his adjusted gross income for a charitable contribution <em>to</em>: churches; schools; hospitals or medical research organizations; organizations that normally receive a substantial part of their support from federal, state, or local governments or from the general public and that aid any of the above organizations; federal, state, and local governments. Also included in this list is a limited category of private foundations (i.e., private operating foundations and conduit foundations<a href="#_ftn3" name="_ftnref3">³</a>) that generally direct their support to public charities.<a href="#_ftn4" name="_ftnref4">⁴</a> The above organizations are often referred to as &ldquo;50 (or 60) percent-type charitable organizations.&rdquo;<br /> <br /> <em>Thirty percent limit</em>. The deduction for contributions of most long-term capital gain property to the above organizations, contributions <em>for the use of</em> any of the above organizations, as well as contributions (other than long-term capital gain property, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="741">741</a>) <em>to</em> or <em>for the use of</em> any other types of charitable organizations (i.e., most private foundations, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="743">743</a>) is limited to the lesser of (a) 30 percent of the taxpayer&rsquo;s adjusted gross income, or (b) 50 percent of adjusted gross income minus the amount of charitable contributions allowed for contributions to the 50 (or 60) percent-type charities.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <em>Twenty percent limit</em>. The deduction for contributions of long-term capital gain property to most private foundations (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="741">741</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="743">743</a>) is limited to the lesser of (a) 20 percent of the taxpayer&rsquo;s adjusted gross income, or (b) 30 percent of adjusted gross income minus the amount of charitable contributions allowed for contributions to the 30 percent-type charities.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Deductions denied because of the 50 (or 60) percent, 30 percent or 20 percent limits may be carried over and deducted over the next five years, retaining their character as 50 (or 60) percent, 30 percent or 20 percent type deductions.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Gifts are &ldquo;to&rdquo; a charitable organization if made directly to the organization. &ldquo;For the use of&rdquo; applies to indirect contributions to a charitable organization (e.g., an income interest in property, but not the property itself).<a href="#_ftn8" name="_ftnref8">⁸</a> The term &ldquo;for the use of&rdquo; does not refer to a gift of the right to use property. Such a gift would generally be a nondeductible gift of less than the donor&rsquo;s entire interest.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 62(a)(22), added by the 2020 CARES Act.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;CARES Act &sect; 2205.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;IRC &sect; 170(b)(1)(E).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;IRC &sect; 170(b)(1)(A).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;IRC &sect;&sect; 170(b)(1)(B), 170(b)(1)(C).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;IRC &sect; 170(b)(1)(D).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;IRC &sect;&sect; 170(d)(1), 170(b)(1)(D)(ii).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;Treas. Reg. &sect; 1.170A-8(a)(2).<br /> <br /> </div></div><br />

<div class="Section1">The treatment of a contribution of appreciated tangible personal property (i.e., property which, if sold, would generate long-term capital gain) depends on whether the use of the property is related or unrelated to the purpose or function of the (public or governmental) organization. If the property is related use property (e.g., a contribution of a painting to a museum), generally the full fair market value is deductible, up to 30 percent of the individual's adjusted gross income; however, if the property is unrelated use property, the deduction is generally limited to the donor's adjusted basis.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC §§ 170(e)(1)(B), 170(b)(1)(C); Treas. Reg. § 1.170A-4(b).<br /> <br /> </div>

<div class="Section1">No charitable deduction is allowed for a contribution of cash, check, or other monetary gift unless the donor maintains either a bank record or a written communication from the donee showing the name of the organization and the date and the amount of the contribution.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> Charitable contributions of $250 or more (whether in cash or property) must be substantiated by a contemporaneous written acknowledgment of the contribution supplied by the charitable organization. (An organization can provide the acknowledgement electronically, such as via an e-mail addressed to the donor.)<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> In prior years, substantiation was not required if certain information was reported on a return filed by the charitable organization (this exception was repealed by the 2017 Tax Act for tax years beginning after December 31, 2016).<a href="#_ftn3" name="_ftnref3">³</a> Special rules apply to the substantiation and disclosure of quid pro quo contributions and contributions made by payroll deduction.<a href="#_ftn4" name="_ftnref4">⁴</a> A qualified appraisal is generally required for contributions of nonreadily valued property for which a deduction of more than $5,000 is claimed.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> No charitable deduction is allowed for a contribution of clothing or a household item unless the property is in good or used condition. Regulations may deny a deduction for a contribution of clothing or a household item which has minimal monetary value. These rules do not apply to a contribution of a single item if a deduction of more than $500 is claimed and a qualified appraisal is included with the return. Household items include furniture, furnishings, electronics, linens, appliances, and similar items; but not food, art, jewelry, and collections.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Special rules apply to certain types of gifts, including charitable donations of patents and intellectual property, and for donations of used motor vehicles, boats, and airplanes.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 170(f)(17).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRS Pub. 1771 (March 2016), p. 5.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 170(f)(8) (repealed by Pub. Law. No. 115-97).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. §§ 1.170A-13(f), 1.6115-1.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 170(f)(11).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. IRC § 170(f)(16).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>. IRC §§ 170(e)(1)(B), 170(f)(11), 170(f)(12), 170(m); Notice 2005-44, 2005-25 IRB 1287.<br /> <br /> </div>

An individual who itemizes may take a deduction for certain contributions "to" or "for the use of" charitable organizations. The amount that may be deducted by an individual in any one year is subject to the income percentage limitations.The value that may be taken into account for various gifts of property depends on the type of property and the type of charity to which it is contributed.

<div class="Section1"><em>Editor&rsquo;s Note:</em> The 2017 tax reform legislation increased the 50 percent AGI limit on contributions to public charities and certain private foundations to 60 percent for tax years beginning after 2017 and before 2026.<div class="Section1"><br /> <br /> If an individual makes a charitable contribution to a 50 (or 60) percent-type charity (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="740">740</a>) of property that, if sold, would have resulted in long-term capital gain (other than certain tangible personal property, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="742">742</a>), he is generally entitled to deduct the full fair market value of the property, but the deduction will be limited to 30 percent of adjusted gross income.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <em>Long-term capital gain property.</em> &ldquo;Long-term capital gain&rdquo; means &ldquo;gain from the sale or exchange of a capital asset held for more than one year, if and to the extent such gain is taken into account in computing gross income.&rdquo;<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Any portion of a gift of long-term capital gain property to a 50 (or 60) percent-type organization that is disallowed as a result of the adjusted gross income limitation may be carried over for five years, retaining its character as a 30 percent type deduction (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="740">740</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A taxpayer may elect in any year to have gifts of long-term capital gain property be subject to a 50 (or 60) percent of adjusted gross income limit; if he does so, the gift is valued at the donor&rsquo;s adjusted basis. Once made, such an election applies to all contributions of capital gain property during the taxable year (except unrelated use gifts of appreciated tangible personal property, as explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="742">742</a>) and is generally irrevocable for that year.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The deduction for any charitable contribution of property is reduced by the amount of gain that would <em>not</em> be long-term capital gain if the property were sold at its fair market value at the time of the contribution.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 170(b)(1)(C).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;IRC &sect; 1222(3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;IRC &sect; 170(b)(1)(C)(ii).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;IRC &sect; 170(b)(1)(C)(iii); <em>Woodbury v. Commissioner</em>, TC Memo 1988-272, <em>aff&rsquo;d</em>, 90-1 USTC &para; 50,199 (10th Cir. 1990).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;IRC &sect; 170(e)(1)(A).<br /> <br /> </div></div><br />