Individuals and businesses making contributions to charity should keep in mind several important tax law changes made by the Pension Protection Act [Pension Protection Act of 2006, Pub. L. No. 109-280, 109 Cong., th 2d Sess. (17 August 2006)].
IRAs: An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option is available only 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, under IRC Section 170(f)(11)(B), 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 who 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 under IRC Section 170(f)(8)(A) that a taxpayer get an acknowledgment 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.
1. Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2007. This is true even if the credit-card bill isn’t paid until next year.
2. Checks count for 2007, as long as they are mailed in 2007.
3. Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online at www.irs.gov and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found on www.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.
4. For an individual, only a taxpayer who itemizes his or her 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, and so forth) exceed the standard deduction.
5. 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 which includes a description of the property and its condition.
6. 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 contemporaneous statement, must be provided to the donor by the donee organization and attached to the donor’s tax return. See IRS Publication 526, Charitable Contributions, for more information. The donee organization may use a completed Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, for the contemporaneous written acknowledgment. Form 1098-C, along with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, filed after December 31, 2007, must be filed with either the Internal Revenue Service Center, Kansas City, MO 64999, or the Internal Revenue Service Center, Austin, TX 73301. The Internal Revenue Service Center at Ogden remains the location for Form 1098-C filed on or before December 31, 2007. Future changes to the filing location for Form 1098-C will be announced and placed in the instructions to Form 1096, Annual Summary and Transmittal of U.S. Information Returns [Notice 2007-70, 2007-40 I.R.B. 1].
Doug H. Moy
Doug H. Moy is a nationally recognized author, consulting specialist, seminar instructor and educator. He has an undergraduate degree from Willamette University and a Masters degree from Washington State University. Since 1979, Mr. Moy has consulted to attorneys, tax practitioners and their clients, as well as assisted practitioners representing clients before the IRS Conference of Right and Appeals Division and Settlement Conference Negotiations. He is noted for his ability to communicate his unparalleled knowledge and experience to practitioners at all levels in his field of expertise; namely, estate/gift taxation and planning, with special expertise in living trusts; community property; lottery prize winnings; structured settlement trusts; extricating clients from abusive trust tax shelters; designing effective estate plans; and preparation of Form 706 Estate Tax Returns and 709 Gift Tax Returns. He offers particular assistance and exceptional skill designing creative, practical solutions to challenging and difficult estate planning situations.