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Americans are going to have to keep better
records of their charitable contributions if they want to claim
them as tax deductions in coming years. Older Americans, meanwhile,
will get a break on taxes when they make donations from their
Individual Retirement Accounts.
These are among the charitable tax reforms
tucked into the huge Pension Protection Act of 2006 that was
approved by Congress last summer. Although much of the legislation
focuses on keeping workers’ pensions safe and fully funded,
there are a number of provisions aimed at encouraging charitable
giving while, at the same time, tightening reporting
requirements.
Some experts believe there likely would be
a big, overall increase in donations from IRA accounts by elderly
taxpayers. On the other hand, the stricter reporting requirements
for contributions of cash and non-cash items, such as used
clothing, could discourage some other donors.
One of the most significant changes has to
do with tax-free distributions from IRAs for charitable purposes.
In the past, the owner of a traditional IRA would have had to take
a distribution from the account and include it in his or her
taxable income before making the donation. Under current law,
donors may make a contribution directly from the IRA to a qualified
charity. The donation is then neither includible as income on the
taxpayer’s return nor deductible as a charitable
contribution.
IRA owners will be able to make maximum
annual contributions of $100,000, although they also could smaller
amounts.
The limitations are that the donor must be
701⁄2 when making the gift and must contribute the money to a
public charity such as the United Way and not to a nonpublic entity
such as a donor-advised fund or private foundation. In short, it
must qualify under Section 501(c) of the Internal Revenue Code.
The IRA provision will be good for only
two years, 2006 and 2007, and then will disappear if not extended
by Congress.
The revisions governing cash and non-cash
contributions will affect the millions of taxpayers who itemize
deductions for charitable donations.
Congress said there was rising concern
about abusive deductions, especially involving clothing and
household goods. It cited Internal Revenue Service statistics
indicating that individuals reported non-cash donations totaling
almost $37 billion in 2003, the most recent year available, with
nearly half representing clothing.
Starting immediately, donated items will
have to be in “good used condition or better,”
according to the new law. It remains unclear how this is going to
be enforced, since it’s unlikely the government can have a
monitor at every Salvation Army or Goodwill intake center checking
the quality of donations. Still, this provision will give the IRS
the ability to deny deductions for contributions with minimal
monetary value, such as used socks, in audits and other reviews of
returns.
Also, in the past, an appraisal was
required for any item valued at $5,000 or more; under the new law,
an appraisal will be needed for any item valued at $500 or
more.
When it comes to cash contributions, no
deduction will be allowed starting in 2007 unless the donor can
show a bank record or a written communication from the charity. The
document must include the name of the charity, the date of the
contribution and the amount. In the past, consumers needed written
acknowledgment from qualified charities only for contributions of
$250 or more.
The nonprofit sector is watching to see
what “innovative solutions” there might be for this,
such as computer-generated receipt systems.
The IRS currently is reviewing all its tax
forms, publications and Internet sites to identify the changes
needed for the current tax filing season.
As always, it is recommended that a
competent tax professional be consulted. The tax laws are ever
changing, evolving and increasing in complexity.
• • •
This information is provided as a public
service and should not be construed as individual accounting or tax
planning advice. For information on how these general principles
apply to your situation, please consult an accounting or tax
professional.
Harry Rabb is a C.P.A. and owner of
Accounting Services, Inc., 935 Main Street, Suite D-1, Safety
Harbor. Call 727-725-4121.
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