The IRS has reminded taxpayers making charitable contributions to keep in mind important tax law changes made in 2006 by the Pension Protection Act. The act provides older owners of IRAs with a new way to give to charity. Rules designed to provide greater certainty in determining what may be deducted as a charitable contribution are also provided under the act.
New Tax Break for Older IRA Owners: An IRA owner who is age 70 1/2 or over can transfer tax-free up to $100,000 per year to an eligible charitable organization. However, this option is available in 2006 and 2007 only. Eligible IRA owners can take advantage of this tax break regardless of whether they itemize their deductions.
Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and SEP plans, are not eligible for favorable tax treatment. Public charities are eligible recipients, but donor advised funds and supporting organizations are not.
The funds must be contributed directly by the IRA trustee to the eligible charity to qualify for tax-free treatment. No deduction is available for the amount given to charity.
Amounts that are directly transferred are counted when determining whether the IRA owner has satisfied the required minimum distribution rules. For individuals who have made nondeductible contributions to their traditional IRAs, a special rule treats directly transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds (as would be the case with regular distributions).
Monetary Donations: To deduct any charitable donation of money under the new law, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity, the date and the amount of the contribution. Prior law allowed taxpayers to “substantiate” (i.e., back up) their cash donations with personal bank registers, diaries or notes made around the time of the donation. But under the act, those types of self-created records are no longer sufficient.
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 in addition to the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date.
Monetary donations include donations 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, 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.
The new law does not change the prior-law requirement that a taxpayer must get an acknowledgement from a charity for each deductible donation (either money or property) of $250 or more. But according to the service, one statement containing all of the required information may meet the requirements of both provisions.
The new rules apply to contributions made in taxable years beginning after Aug. 17, 2006. For most individual taxpayers, who generally file returns on a calendar-year basis, the new rule applies to contributions made beginning in 2007.
Clothing and Household Items: To be deductible, clothing and household items (e.g., furniture, electronics, appliances, and linens) donated to charity after Aug. 17, 2006, must be in good used condition or better. A taxpayer may, however, 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. See IRS News Release IR-2006-192.