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Katrina Brings Larger Charitable Deductions

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Many taxpayers wait until the end of the year to make charitable donations. Recently passed legislation now permits larger than normal charitable deductions but only for a limited period of time. Individual taxpayers may be well-advised to plan now rather than waiting until later.

Under the Katrina Emergency Tax Relief Act of 2005, taxpayers can deduct cash contributions without regard to the ordinarily applicable 50% of adjusted gross income limit. More specifically, the deduction is allowed up to the amount by which the taxpayer’s adjusted gross income exceeds the deduction for other charitable contributions (excess contributions can be carried forward).

Here are the ground rules: First, the tax break applies only to individuals who itemize their deductions.

Second, contributions must be paid during the period beginning Aug. 28, 2005, and ending Dec. 31, 2005. Considering that three-quarters of this year already has passed, that really doesn’t leave you and your clients very much time to waste.

Third, donations must be made in cash or by check, so contributions of appreciated property aren’t eligible.

Fourth, contributions must be made to qualified charities other than supporting organizations.

It’s worth noting here that individual donors get extra leeway with respect to the use of those funds by the charities. Unlike corporations–whose contributions must be made for relief efforts related to Hurricane Katrina–cash gifts from individual donors are not so restricted.

Finally, individual taxpayers must make an election to have this treatment apply.

An additional tax break provided under the act is the temporary relaxation of one of the so-called “stealth taxes”–the limitation on itemized deductions. The new law provides that the deduction for qualified cash contributions is not treated as an itemized deduction for purposes of the overall limitation on itemized deductions.

The potential benefit of these two breaks taken together is worth serious consideration. Undoubtedly, many individuals already have donated money to charity in response to the urgent appeals for donations that occurred in the wake of Katrina. But with an opportunity of this scope still in effect, some taxpayers might want to consider giving even more than they already have–and those who hadn’t planned to give at all may change their minds.

So, urge your clients to take advantage of this window of opportunity before it’s too late!

Sonya E. King, JD, LLM, is an editor of Tax Facts, a publication of The National Underwriter Company. She can be reached via e-mail at [email protected].


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