Use It or Lose It Rule for Charitable Deductions

Donors sometimes ask whether the five-year carryover provision for charitable deductions that exceed the applicable ceilings (50% of AGI for cash gifts, 30% for long-term capital gain assets) means they have flexibility as to when they use their charitable contribution deductions. For example, can a donor who makes a large contribution in one year take his deductions in dribs and drabs – stretching the deductions out over as many as six years?

The answer to that question, unfortunately, is no.  Code §461 requires that taxpayers take deductions for the taxable year in which the deductions become available, which is the IRS’s way of saying “use it or lose it.” An exception is made for charitable contributions to the extent a contribution exceeds the 50% or 30% of AGI ceiling. Carryovers of excess deductions are permitted, but the donor must claim the maximum charitable deduction possible in the year of the gift and in each carryover year. Deductions that could have been taken but were not are lost.

In one case, a couple’s $122,214 charitable deduction for 2002 was audited in 2004 by the IRS, which found proper substantiation, but told the donors they would have to carry over $61,150 of the deduction. The IRS did not tell the couple to amend their 2003 return to claim some of the carryover. The donors claimed carryover deductions in 2004 and 2005. For 2005, the IRS disallowed all but $1,944 of the $10,000 claimed.  The Tax Court agreed with the IRS, saying that a carryover is good for the five years immediately following the deduction and that some portion expires each year, whether used or not. The court said the IRS was not responsible for informing the couple of the option to amend their return and the court had no authority to suspend or adjust the period of limitations to accommodate the carryover (Maddux v. Comm’r., T.C. Summ. Op. 2009-30).

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