How IRC 2522 Governs Charitable Gift Deductions

The U.S. federal tax code incentivizes philanthropy through a deduction for charitable contributions. Governed by Internal Revenue Code (IRC) Section 2522, this provision allows individuals to subtract the value of gifts made to qualified charities from their total taxable gifts for a given year. By reducing the amount of gifts subject to federal gift tax, this deduction is an important part of philanthropic and estate planning. The rules outline which organizations are eligible, the types of property that can be given, how gifts are valued, and the method for reporting them to the IRS.

Identifying Qualified Charitable Organizations

A foundational requirement for a gift to be deductible is that it must be made to a “qualified” organization as defined by the tax code. Eligible recipients include:

• The United States government, any state, or a local political subdivision, if the gift is for exclusively public purposes.
• Corporations, trusts, or foundations organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.
• Certain fraternal societies or orders, but only if the gifts are used for charitable purposes.
• Posts or organizations of war veterans organized within the United States or its possessions.

To be eligible, an organization must not dedicate a substantial part of its activities to influencing legislation or participating in political campaigns. Before making a contribution, a donor should confirm the organization’s status. The most direct way is using the IRS’s online “Tax Exempt Organization Search” tool to verify that an organization is a registered 501(c)(3) entity and eligible to receive tax-deductible contributions.

Types of Deductible Charitable Gifts

The most straightforward type of contribution is an outright gift, where a donor transfers their entire interest in an asset, such as cash or property, directly to a qualified charity. In these cases, the donor relinquishes all control and ownership of the asset, and the charity receives it without any strings attached.

More complex arrangements, known as “split-interest” gifts, allow a donor to divide the interests in a property between a charitable and a non-charitable beneficiary. This means one party receives benefits for a period, while the other receives the remaining value. These structures are often established through specialized trusts and are governed by detailed regulations.

A primary vehicle for such gifts is the Charitable Remainder Trust (CRT). With a CRT, a donor transfers assets into an irrevocable trust, which then makes payments to one or more non-charitable beneficiaries for a specified term or for their lifetimes. At the end of this period, the remaining assets in the trust are distributed to the designated charity. There are two main types of CRTs: the Charitable Remainder Annuity Trust (CRAT), which pays a fixed dollar amount each year, and the Charitable Remainder Unitrust (CRUT), which pays a fixed percentage of the trust’s value, recalculated annually.

Conversely, a Charitable Lead Trust (CLT) functions as a mirror image of a CRT. In a CLT, the income from the trust is paid to a charity for a set number of years. After this term expires, the remaining assets in the trust are transferred to a non-charitable beneficiary, who could be the donor or their family members. This trust is often used to transfer assets to heirs with a reduced gift or estate tax impact, as the value of the gift to the family is reduced by the present value of the income stream paid to the charity.

Determining the Value of the Deduction

For an outright gift of property, the deduction is equal to the fair market value (FMV) of the asset on the date it is transferred to the charity. Fair market value is defined as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. For assets like publicly traded securities, the FMV is easily determined, while items like real estate or collectibles require a formal appraisal.

For split-interest gifts, the calculation is more nuanced. The donor cannot deduct the full fair market value of the property transferred into the trust because a portion will benefit a non-charitable recipient. Instead, the deduction is limited to the present value of the interest that the charity will eventually receive. This calculation determines what the charity’s future interest is worth in today’s dollars.

This present value calculation is based on several factors prescribed by the IRS. These include the term of the trust, the payout rate to the non-charitable beneficiary, and a specific interest rate known as the Section 7520 rate. This rate is published monthly by the IRS, and a donor can elect to use the rate for the month of the gift or for either of the two preceding months to maximize the deduction.

How to Report the Charitable Deduction

To claim the deduction, a gift must be reported to the IRS on Form 709, the United States Gift Tax Return. This form is used to report all taxable gifts made during a calendar year and is where charitable deductions are formally claimed. The return is due by April 15th of the year following the gift.

On Form 709, charitable gifts are listed on Schedule A, “Computation of Taxable Gifts.” The donor must provide details about the recipient organization and the gift’s value. The total amount of charitable gifts is then entered as a deduction on this schedule, which reduces the total taxable gifts for the year.

Proper documentation is required when filing. For noncash gifts valued at more than $5,000, the donor must obtain a qualified appraisal and attach Form 8283, “Noncash Charitable Contributions.” For split-interest gifts, a copy of the trust instrument must be submitted with the return. Failing to provide adequate disclosure and the required attachments can result in the disallowance of the deduction or leave the valuation of the gift open to challenge by the IRS.