It’s No Joke: Colbert Announces Funding For All SC Public School Requests On DonorsChoose

Earlier this month, South Carolina public school teachers received some good news when Stephen Colbert announced that he would fund all of their existing grant requests on the web site DonorsChoose.org. The announcement, made at a surprise event at Alexander Elementary School, means that nearly 1,000 projects totaling more than $800,000 in 375 schools will receive funding this year.

Colbert, a product of South Carolina public schools, made the announcement on video. You can watch it here:

If you’re not familiar with DonorsChoose, it’s a charitable organization which allows donors to search proposals by areas of interest and choose to fund the project(s) they find most compelling. You can pick and choose, spending as little as $5 on a project or fund multiple projects, Colbert-style (in partnership with Share Fair Nation and ScanSource).

According to Forbes, Colbert is worth somewhere around $10 million. However, when he takes over David Letterman’s spot in September, his worth will likely skyrocket. Expect, says Forbes, to see him on the Celebrity 100.

When wealthy donors make grand gestures like this one, it’s easy to think that it’s all about the donation. However, what you might not be aware of is that donors – especially those at the top of the income brackets – are subject to limitations and restrictions. Donations are not always 100% deductible for federal income tax purposes even if they would otherwise meet all of the charitable donation criteria.

When it comes to charitable gifts, you can generally deduct gifts up to 50% of your adjusted gross income (AGI) for the current tax year. Your adjusted gross income is the found on your form 1040 at line 37.

For lower and middle class taxpayers who generally donate a few hundred or few thousand dollars each year, you likely aren’t even aware that the limitation exists. But for high income taxpayers – or those that make significant donations – deductions may be limited. Here’s the math:

Let’s say your AGI is $200,000 and you make a donation to a public charity worth $500,000. That’s possible, of course, since your donation might be from your assets, not just from income. However, your deduction for the tax year is limited to $100,000, or 50% of the $200,000.

That doesn’t mean that you’re completely out of luck. You may be able to carry over those excess donations to future tax years. Generally, you can carry forward the excess for the next 5 years until you use up the extra. Each year, however, your total charitable deduction is still limited to 50% of your AGI. Some ordering rules apply – you’ll want to make yourself familiar with those.

The 50% rule applies to all public charities, all private operating foundations, certain private foundations that make distributions to public charities and private operating foundations (subject to timing rules) and certain private foundations which pool contributions in a common fund and pay out to public charities.

In some cases, 20% and 30% limitations apply. The 30% limit applies to donations to private foundations (other than mentioned above) and to other section 170(c) organizations that don’t qualify for the 50% limitation. The 20% limit applies to contributions of capital gain property to or for the use of qualified organizations.

You can figure out which limitations apply by asking the charitable contribution or checking Select Check on the IRS web site.

But that’s not the only hurdle. Itemized deductions are now capped or phased out for high income taxpayers. Those limitations, sometimes called the Pease limitations, named after former Rep. Don Pease (D-OH), kick in for individuals in 2015 with incomes of $258,250 or more ($309,900 for married couples filing jointly). What the Pease limitations do, effectively, is reduce the total amount of deductions you can claim on your return.

If the Pease limitations apply, the total of all your itemized deductions is reduced by the lesser of:

• 3% of AGI above the applicable threshold; or
• 80% of the amount of itemized deductions otherwise allowable for the tax year.

Here’s the math:

Let’s say your AGI is $400,000 and your affected itemized deductions total $50,000. The Pease limitations reduce your deductions at a rate of 3% – or 3 cents for each dollar – over the threshold. Since the overage was $141,750 ($400,000 – $258,250), this reduces your allowable deductions by $4,252.50 resulting in a deduction of $45,747.50. At a marginal rate of 33%, you can see that the loss of deduction costs you about $1,400. As income (and tax rates) go up, the loss of the deduction hits your wallet more.

(Note that I didn’t figure in exceptions or other tax specific behaviors as I was just trying to make the point about a loss of deduction.)

Pease limitations aren’t specific to charitable donations: they apply to certain other itemized deductions like the home mortgage interest deduction, state and local tax deductions and miscellaneous itemized deductions. They do not include medical expenses, investment expenses, gambling losses and certain theft and casualty losses.

Together, the limitations on AGI and the Pease limitations can make a significant dent in the deductibility of charitable gifts. Next time you see a significant donation from a celebrity like Colbert or an entrepreneur like Warren Buffett, don’t assume that they’re getting the biggest reward back for their generosity: those gifts may not be 100% deductible.