WASHINGTON — Individuals and businesses making
contributions to charity should keep in mind several important
tax law changes made last summer by the Pension Protection Act.
The new law offers older owners of individual
retirement accounts a new way to give to charity. It also includes
rules designed to provide both taxpayers and the government greater
certainty in determining what may be deducted as a charitable
contribution. Some of these changes include the following.
New Tax Break for IRA Owners
An IRA owner, age 70 ˝ or over, can directly
transfer tax-free, up to $100,000 per year to an eligible charitable
organization. This option is available in tax years 2006 and 2007.
Eligible IRA owners can take advantage of this provision, regardless
of whether they itemize their deductions. Distributions from employer-sponsored
retirement plans, including SIMPLE IRAs and simplified employee
pension (SEP) plans are not eligible.
To qualify, the funds must be contributed directly
by the IRA trustee to the eligible charity. Amounts so transferred
are not taxable and no deduction is available for the amount given
to the charity.
Not all charities are eligible under this provision.
For example, donor-advised funds and supporting organizations
are not eligible recipients.
Transferred amounts are counted in determining
whether the owner has met the IRA’s required minimum distribution
rules. Where individuals have made nondeductible contributions
to their traditional IRAs, a special rule treats transferred amounts
as coming first from taxable funds, instead of proportionately
from taxable and nontaxable funds, as would be the case with regular
distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items
donated to charity after Aug. 17, 2006, must be in good used condition
or better. However, a taxpayer may claim a deduction of more than
$500 for any single item, regardless of its condition, if the
taxpayer includes a qualified appraisal of the item with the return.
Household items include furniture, furnishings, electronics, appliances,
and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, a
taxpayer must have a bank record or a written communication from
the charity showing the name of the charity and the date and amount
of the contribution. A bank record includes canceled checks, bank
or credit union statements and credit card statements. Bank or
credit union statements should show the name of the charity and
the date and amount paid. Credit card statements should show the
name of the charity and the transaction posting date.
Donations of money include those made in cash
or by check, electronic funds transfer, credit card, and payroll
deduction. For payroll deductions, the taxpayer should retain
a pay stub, Form W-2 wage statement or other document furnished
by the employer showing the total amount withheld for charity,
along with the pledge card showing the name of the charity.
Prior law allowed taxpayers to back up their
donations of money with personal bank registers, diaries or notes
made around the time of the donation. Those types of records are
no longer sufficient.
This provision applies to contributions made
in taxable years beginning after Aug. 17, 2006. For taxpayers
that file returns on a calendar-year basis, including most individuals,
the new provision applies to contributions made beginning in 2007.
The new law does not change the prior-law requirement
that a taxpayer get an acknowledgement from a charity for each
deductible donation (either money or property) of $250 or more.
However, one statement containing all of the required information
may meet the requirements of both provisions.
To help taxpayers plan their holiday-season and
year-end donations, the IRS offers the following additional reminders:
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Contributions are deductible in the year made. Thus, donations
charged to a credit card before the end of the year count
for 2006. This is true even if the credit-card bill isn’t
paid until next year. Also, checks count for 2006 as long
as they are mailed this year.
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Check that the organization is qualified. Only donations
to qualified organizations are tax-deductible. IRS Publication
78, available online and at many public libraries, lists most
organizations that are qualified to receive deductible contributions.
The searchable online version can be found on IRS.gov under,
“Search for Charities.” In addition, churches, synagogues,
temples, mosques and government agencies are eligible to receive
deductible donations, even though they often are not listed
in Publication 78.
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For individuals, only taxpayers who itemize their deductions
on Schedule A can claim a deduction for charitable contributions.
This deduction is not available to people who choose the standard
deduction, including anyone who files a short form (1040A
or 1040EZ). A taxpayer will have a tax savings only if the
total itemized deductions (mortgage interest, charitable contributions,
state and local taxes, etc.) exceeds the standard deduction.
Use the 2006 Schedule A, available now on IRS.gov, to determine
whether itemizing is better than claiming the standard deduction.
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For all donations of property, including clothing and household
items, get from the charity, if possible, a receipt that includes
a description of the donated property. If a donation is left
at a charity’s unattended drop site, keep a written record
of the donation that includes a description of the property
and its condition.
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The deduction for a motor vehicle, boat or airplane donated
to charity is usually limited to the gross proceeds from its
sale. This rule applies if the claimed value of the vehicle
is more than $500. Form 1098-C, or a similar statement, must
be provided to the donor by the organization and attached
to the donor’s tax return. See IRS Publication 526, Charitable
Contributions, for more information.
