REG · Federal Taxation of Individuals · 6 practice questions
Charitable Contribution Deductions: FMV, Basis, and Timing
For public charities, generally use FMV for long-term capital gain property, basis for appreciated short-term or ordinary-income property, and payment minus benefits for fundraisers. Below, sort cash-basis Lee's independent Year 1 examples; assume itemization, substantiation, and no percentage limits.
Try one first
Hint
Focus on what changes donated appreciated stock from basis property to fair-market-value property for charitable deduction purposes.
Answer D. For a contribution of appreciated capital gain property to a qualified public charity, the donor may generally deduct the fair market value only if the property is long-term capital gain property. For stock, that means the donor must have held it for more than 1 year before the contribution. If the stock is short-term (held one year or less), the deduction is limited to the donor's basis. The stem removes AGI-limit and private-foundation issues, so holding period is the controlling factor here.
Why not A: How the donor financed the purchase of the stock does not determine whether a charitable deduction is measured at FMV or at basis. The key tax rule focuses on whether the donated property is long-term capital gain property.
Why not B: This is tempting because candidates may think the donee's handling of donated property always affects the donor's deduction. However, for publicly traded stock given to a qualified public charity, the donor's deduction is determined by the donor's holding period (long-term vs. short-term), not whether the charity subsequently sells the shares.
Why not C: AGI percentage limits affect how much of the charitable deduction a donor can use in a given year, so this is a plausible distractor. The stem, however, explicitly removes AGI-percentage complications and the question asks about valuation (FMV vs. basis), which is governed by the holding period rather than AGI absorption.
Sort it
The gift is completed in Year 1 with no ordinary-income, short-term gain, or benefit reduction.
The Year 1 amount must exclude short-term or ordinary-income gain, or the FMV of benefits received.
No payment is completed in Year 1; the qualifying gift is paid in Year 2.
The claim is for personal services or household goods that fail the condition requirement.
| Item | Goes to |
|---|---|
| Lee donates publicly traded stock held three years: basis $1,000; FMV $2,000. | Year 1: full amount or FMVThe stock is long-term capital gain property. The deduction is its $2,000 FMV. |
| Lee pays $1,000 for a charity dinner and receives a meal worth $200. | Year 1: reduced amountSubtract the benefit received: $1,000 minus $200 gives an $800 deduction. |
| Lee signs a legally enforceable $1,000 pledge in Year 1 and pays it in January of Year 2. | Year 2: payment completedAn enforceable promise is still not payment. The $1,000 deduction belongs in Year 2. |
| Lee spends $200 on unreimbursed supplies used directly in the charity's volunteer program. | Year 1: full amount or FMVThe $200 is a qualifying out-of-pocket volunteer expense, not the value of Lee's services. |
| Lee donates publicly traded stock held eight months: basis $1,000; FMV $2,000. | Year 1: reduced amountThe stock is short-term property. Excluding its $1,000 appreciation leaves a $1,000 basis deduction. |
| Lee provides five hours of professional services normally billed at $200 per hour. | No deductionThe $1,000 value of Lee's services is not deductible. |
| Lee charges a $1,000 donation in December of Year 1 and pays the card bill in January of Year 2. | Year 1: full amount or FMVThe $1,000 gift is paid when charged. Paying the card bill later does not delay the deduction. |
| Lee donates a painting Lee created and held three years: tax basis $200; FMV $1,000. | Year 1: reduced amountDonor-created art is ordinary-income property. The deduction is $200, even after a three-year holding period. |
| Lee writes a $1,000 check in Year 1, keeps it until mailing in Year 2, and the check is honored. | Year 2: payment completedWriting and keeping a check does not complete the gift. Mailing in Year 2 controls. |
| Lee donates used furniture in good condition: original cost $1,000; current FMV $200. | Year 1: full amount or FMVThe deduction is the furniture's $200 donation-date FMV, not its original cost. |
| Lee donates business inventory: basis $200; FMV $1,000. No enhanced deduction applies. | Year 1: reduced amountInventory is ordinary-income property. Excluding its appreciation leaves a $200 basis deduction. |
| Lee drives 100 unreimbursed miles solely for volunteer work for the charity. | Year 1: full amount or FMVThe deduction is $14: 100 miles at the statutory charitable rate of 14 cents per mile. |
| Lee donates used clothing in poor condition with an FMV of $200. | No deductionThis clothing fails the good-used-condition requirement and does not qualify for the appraisal exception. |
| Lee properly mails a $1,000 check on December 31 of Year 1; it is received and honored in Year 2. | Year 1: full amount or FMVA properly mailed check that is later honored counts when mailed. The full $1,000 belongs in Year 1. |
Key points
- Remember: Find the deductible gift first, then ask when payment was completed.
- More than one year is required; exactly one year still counts as short-term.
- The charity's later sale of donated stock does not change the donor's holding-period classification.
How the exam traps you
- Using FMV for every property gift. Check whether a sale would produce long-term capital gain; appreciation in short-term or ordinary-income property is excluded.
- Deducting the dinner's full price or a volunteer's normal fee. Subtract benefits received; deduct qualifying unreimbursed expenses, not the value of services.
- Waiting for the card bill or check clearance. Use the charge date or mailing date for an honored check; a pledge alone is not payment.
Question 2
| Contribution | Amount / FMV | Details |
|---|---|---|
| Cash contribution by check (delivered in Year 1) | $1,200 | |
| Publicly traded stock held 14 months | $15,000 FMV | Basis $9,000 |
| Painting held 8 months | $7,000 FMV | Basis $4,000 |
| Payment for two charity gala tickets | $500 | Dinner value disclosed: $160 |
| Legally enforceable pledge (signed Dec Year 1, paid Jan Year 2) | $3,000 |
Hint
Classify each transfer (cash vs long-term property vs short-term property vs quid pro quo vs unpaid pledge) and then apply the timing/valuation rule for that class.
Answer D. Year 1 deductions: $1,200 cash (check delivered in Year 1); $15,000 FMV for the publicly traded stock (held >1 year); $4,000 for the painting (held only 8 months, so short-term property deductible only to basis); and $340 for the gala ($500 paid minus $160 value received). The $3,000 pledge was unpaid in Year 1 and, as a cash-basis taxpayer, Harper deducts it only when paid in Year 2. Total = $1,200 + $15,000 + $4,000 + $340 = $20,540.
Why not A: This equals $1,200 + $15,000 + $340 = $16,540 and omits the painting. It tempts candidates who (incorrectly) treat short-term personal property gifts as entirely nondeductible or simply forget the painting; it fails because short-term capital-gain property donated to a public charity is deductible up to the donor's basis ($4,000 here).
Why not B: This equals $1,200 + $15,000 + $4,000 + $500 = $20,700 and results from treating the full $500 gala payment as deductible. It tempts candidates who overlook quid pro quo rules; it fails because contributions that include goods or services must be reduced by the fair market value of those benefits, leaving only $500 − $160 = $340 deductible for the gala.
Why not C: This equals the correct $20,540 plus the $3,000 pledge = $23,540, and is attractive to candidates who assume a legally enforceable pledge is deductible when signed. It fails because Harper is a cash-basis taxpayer, so an unpaid pledge signed in Year 1 is not deductible until paid in Year 2.
Question 3
Hint
Focus on the tax rule for when a cash-basis individual is considered to have paid a charitable contribution made by credit card.
Answer B. For cash-basis individual taxpayers, a charitable contribution made by credit card is treated as paid when the charge is made (when the donor incurs the obligation on the card), not when the credit-card bill is later paid. Because Lara's charge posted in Year 1 and all deduction requirements are met, the deduction is claimed in Year 1.
Why not A: This is tempting because taxpayers often equate 'paid' with when cash leaves their bank account. However, for cash-basis donors a credit-card charge is treated as payment when the charge is made, so waiting until the card bill is paid is incorrect.
Why not C: This distractor appeals to a compromise instinct but is incorrect: the intermediary status of a credit card does not split the deduction. The donor is treated as having paid the full amount when the charge is made.
Why not D: This confuses the donor's timing with the charity's receipt or use of funds. The relevant issue for the donor's deduction is when the donor is treated as having paid, which for a credit-card contribution is when the charge posts.
Question 4
Hint
Break the fact pattern into three separate items: the stock gift, the fundraising payment, and the volunteer services.
Answer D. The long-term publicly traded stock gift is deductible at fair market value, so the stock yields an $18,000 deduction. The fundraising dinner is a quid pro quo payment deductible only to the extent the payment exceeds the value of benefits received: $1,200 − $350 = $850. Volunteer services are not deductible, so total deduction = $18,000 + $850 = $18,850.
Why not A: This uses the stock's adjusted basis ($7,000) rather than fair market value; for long-term publicly traded stock donated to a qualifying public charity, the donor generally deducts FMV. Adding the deductible portion of the dinner ($850) to basis gives $7,850, but that understates the correct deduction.
Why not B: This answer incorrectly includes the value of Ortiz's volunteered professional time (20 hours × $200 = $4,000), which is not deductible. Volunteer services generally do not produce a charitable contribution deduction, so this overstates the deduction.
Why not C: This adds the full $1,200 dinner payment to the stock FMV but fails to subtract the $350 value of the benefit received, overstating the deductible amount. The deductible portion of the dinner is $1,200 − $350 = $850, not the full $1,200.
Question 5
Hint
Handle each transfer separately: check the stock's holding period for FMV vs. basis treatment, and remember to reduce event payments by the FMV of benefits received.
Answer B. The donated stock was held less than one year, so it is short-term appreciated property and the deduction is limited to basis ($12,000). The deductible portion of the fundraising payment is the excess over the value received ($1,200 − $350 = $850), so total = $12,000 + $850 = $12,850.
Why not A: This is tempting because it correctly limits the short-term stock to basis but treats the entire $1,200 dinner payment as deductible. It is wrong because the fundraising payment must be reduced by the $350 benefit, so only $850 is deductible and the correct total is $12,850, not $13,200.
Why not C: This option is tempting to someone who mistakenly applies fair-market-value treatment to appreciated stock while correctly reducing the dinner payment. It fails because the stock was held only 8 months (short-term), so the stock deduction is limited to basis $12,000, yielding $12,850 total, not $19,850.
Why not D: This option is tempting because it applies FMV to the stock and also treats the full dinner payment as deductible. Both assumptions are incorrect: the stock deduction is limited to basis and the deductible dinner portion is $850, so the correct total is $12,850, not $20,200.
Question 6
Hint
Classify each donated asset based on how it would be treated if sold at fair market value on the contribution date, then determine whether the deduction is basis or fair market value.
Answer A. The publicly traded stock is long-term capital gain property (held >1 year) donated to a qualified public charity, so the deduction is the stock's fair market value: $18,000. The land was held only 8 months, so it would produce short-term gain if sold and its charitable deduction is limited to basis: $9,000. Total deduction = $18,000 + $9,000 = $27,000.
Why not B: This reverses the rules (basis for the stock and FMV for the land). The correct treatment is FMV for the long-term stock ($18,000) and basis for the short-term land ($9,000).
Why not C: This reflects using basis for both donations (7,000 + 9,000 = 16,000). That ignores the rule that long-term capital gain property donated to a qualified public charity is generally deductible at fair market value.
Why not D: This uses fair market value for both donations (18,000 + 12,000 = 30,000). Because the land was held less than one year, its deduction is limited to basis rather than FMV.
Common questions
Is donated stock deductible at FMV or cost basis?
For appreciated publicly traded stock donated to a qualified public charity, holding it more than one year generally allows FMV. Holding it one year or less limits the deduction to basis.
Can I deduct charity dinner tickets and volunteer expenses?
Deduct only the ticket payment above the FMV of benefits received. Qualifying unreimbursed volunteer expenses, including mileage at 14 cents per mile, are deductible; your time is not.
What year can I deduct a credit-card gift, mailed check, or pledge?
A credit-card gift counts when charged, even if the bill is paid next year. A properly mailed check counts when mailed if later honored; a pledge counts only when paid.
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