CFP - Tax Planning (14% of the exam) - Section E.43

Charitable/philanthropic contributions and deductions

AGI percentage limits by gift type and charity type, deducting appreciated property versus cash, substantiation rules, carryforwards, donor-advised funds, charitable remainder and lead trusts, private foundations and qualified charitable distributions, with items computing the allowable deduction.

Internal Revenue Code Section 170Charitable remainder trust

Practice question for this objective

Free sampleTax Planninghard

Marguerite is 73, married filing jointly, and must take a required minimum distribution of 30,000 dollars from her traditional Individual Retirement Account this year. She gives 20,000 dollars a year to a public charity and has no other deductible outlays apart from 9,000 dollars of state and local taxes and mortgage interest combined. Assume the standard deduction for a married couple filing jointly is 31,500 dollars and the annual limit on qualified charitable distributions is 108,000 dollars per person. She does not need the distributed cash to fund her spending. Which approach produces the lowest taxable income for her this year?

AGive 20,000 dollars in cash and itemize, since the gift now takes her above the standard deduction
BDirect 20,000 dollars of the required minimum distribution to the charity as a qualified charitable distribution Correct
CTake the full 30,000 dollar distribution and give 20,000 dollars of the proceeds in cash to the charity
DGive 20,000 dollars of appreciated shares from her taxable account and take the standard deduction

For a charitable client over the qualifying age who takes the standard deduction, a qualified charitable distribution beats a cash gift because exclusion beats a lost deduction. A qualified charitable distribution is excluded from gross income rather than deducted from it, so its benefit does not depend on itemizing. A client whose itemized deductions of 29,000 dollars fall short of the 31,500 dollar standard deduction gets nothing from a cash gift, while the same 20,000 dollars sent directly from the Individual Retirement Account removes 20,000 dollars from income and satisfies that much of the required minimum distribution. Taxable income falls by 20,000 dollars and adjusted gross income falls with it, which also protects income tested thresholds.

Why A is wrong: Her itemized deductions would total 20,000 plus 9,000, or 29,000 dollars, which is below the 31,500 dollar standard deduction, so itemizing is worse than not itemizing. The gift buys her no deduction at all and the whole 30,000 dollar distribution stays in income.

Why B is correct: She is past the qualifying age and the amount is within the annual limit, so the 20,000 dollars is excluded from gross income and still counts toward the required minimum distribution. Only the remaining 10,000 dollars is taxed, and she keeps the 31,500 dollar standard deduction in full.

Why C is wrong: This is the intuitive route and it does fund the gift, but the deduction is stranded because 29,000 dollars of itemized deductions still lose to the 31,500 dollar standard deduction. The full 30,000 dollars remains in adjusted gross income, which can also raise the cost of Medicare premiums.

Why D is wrong: Donating appreciated securities is sound advice for a client who itemizes, because it avoids the unrealised gain and deducts fair market value. Here the charitable deduction is lost under the standard deduction anyway, and the required minimum distribution is still fully taxable.

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Exam traps in Tax Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

90,000 dollars this year, the full fair market value of the shares, with no excess to carry forward
Why it is wrong: This values the gift correctly at fair market value but ignores the percentage ceiling altogether; the deduction is measured first by valuation rules and then cut back to the applicable share of adjusted gross income.
She recognises the 1,050,000 dollar gain on transferring the shares to the trust and deducts the full 1,200,000 dollar value in the same year
Why it is wrong: A completed gift to a qualifying split-interest trust is not a sale or exchange, so no gain arises on funding; treating the transfer as a realisation event also wrongly assumes the whole value is deductible when only part of it goes to charity.
The private letter ruling controls, because a ruling issued on identical facts binds the Service as to every taxpayer whose facts match those in the ruling.
Why it is wrong: Tempting because a private letter ruling is genuine written guidance from the Service and does bind it, but that binding effect runs only to the taxpayer who requested the ruling and only on the facts submitted.

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