Maxine Aaronson, Attorney at Law
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Tax Newsletter

  • Itemized Deductions on Married Filing Separately Tax Returns
    When filing your federal tax return, you usually have the option of taking the standard deduction or itemizing your deductions to adjust your taxable income. However, if you are married but filing separate tax returns and choose to... Read more.
  • Elderly and Disabled Tax Credit
    Certain elderly and/or disabled taxpayers may be entitled to a tax credit when filing their federal income tax return. A tax credit can be deducted from the amount of federal income tax owed, as opposed to a tax deduction, which reduces... Read more.
  • Separate Return vs. Joint Return for Federal Taxes
    For federal income tax purposes, there are five tax “statuses:” single; head of household; married filing jointly; married filing separately; and qualifying widow(er) with dependent child. Status affects tax credits and... Read more.
  • Innocent Spouse Relief For Tax Liability
    Many married couples file joint tax returns to take advantage of certain benefits offered by this filing status. This may result in the unfortunate and unintended consequence of one spouse being held responsible for the underreporting... Read more.
Tax News Links

Income Tax Limitations on the Charitable Deduction

Taxpayers who make contributions to qualified charitable organizations are entitled to a tax benefit in the form of a charitable deduction on their income taxes. However, the issue becomes more complex when a non-U.S. citizen makes a bequest to a qualified charitable organization with non-U.S. assets, and then claims a charitable deduction.

Proportional Deduction for Charitable Bequests Paid With Non-U.S. Assets

The Tax Court has held that, in order to deduct charitable bequests in full upon filing a United States Estate Tax Return, the bequests must have been funded from property subject to the U.S. estate tax. If the bequests are funded with property located outside of the U.S., then the taxpayer will only be entitled to a proportional deduction. The deduction is calculated by dividing the value of U.S. assets by the value of worldwide assets, multiplied by the amount of charitable bequests.

In one case, a Canadian citizen had assets worth $516,268 in the U.S. and more than $100 million in Canada. His will provided for charitable bequests to Canadian-registered charities, and when he died the bequests were paid out of his Canadian funds. His estate filed a United States Estate Tax Return and claimed a charitable contribution deduction of approximately $312,840. However, the IRS only allowed a limited charitable deduction of $1,615 based on the following formula: ($516,268/$100 million) x $312,840 = $1,615.

U.S.-Canada Treaty on Income and Capital

Where the charitable bequest at issue is made by a Canadian resident who owns property in the U.S., it is important to consider the U.S.-Canada Treaty with respect to taxes on income and capital as amended by the (third) protocol in 1995. Some relevant provisions of the Treaty include:

  • Relief from double taxation for Canadians who had either retired to the U.S. or owned $60,000 or more of property in the U.S.
  • Credit for Canadians against U.S. estate tax for up to $600,000 of U.S. assets
  • Application of U.S. estate taxes only to U.S. real estate assets where value of a Canadian’s worldwide gross estate is no more than $1.2 million

Still, the Treaty also requires that charitable bequests be funded from property subject to the U.S. estate tax in order for the taxpayer to file for a full deduction.