Jacob M. Leon, CPA/PFS CFP^®

An IRS news release alerts donors to Pension Protection Act (PPA) of 2006 changes that affect charitable giving and offers some year-end giving tips. Specifically, the new release details the PPA's new break for IRA owners, changed rules for donations of clothing and household items, and new recordkeeping requirements for cash donations.

New tax break for IRA owners. Under the PPA, an IRA owner who is age 70 1/2 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.

For a more detailed discussion of the new IRA break and the tax-saving opportunity it offers, see Charitable Contributions From IRAs.

Changed rules for donations of clothing and household items. ITo be deductible under the PPA, clothing and household items (e.g., furniture, furnishings, electronics, appliances, and linens) donated to charity after August 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.

New recordkeeping requirements for cash contributions. Under the PPA, for contributions made in tax years beginning after August 17, 2006, 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.

Observation: Most individuals report on the calendar year so this change won't affect most individuals until 2007. For 2006, under the law that applies for tax years beginning before August 18, 2006, calendar year individuals may back up their donations of money with personal bank registers, diaries or notes made around the time of the donation.

Donations of money under the changed rules 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.

The new law does not change the requirement that a taxpayer get a written acknowledgement from a charity for each deductible donation (either money or property) of $250 or more. IRS says, however, that one statement containing all of the required information may meet the requirements of both provisions.

Year-end giving tips. To help taxpayers plan their holiday-season and year-end donations, IRS offers these additional reminders:

• 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.

• Check that the organization is qualified. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions.

• Taxpayers who are individuals can claim a deduction for charitable contributions only if they itemize their deductions on Schedule A.

• 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.

• 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.

For more details on the new charitable contributions rules as enacted by the Pension Protection Act of 2006 see our article Charitable Giving Incentives and Reform

For more information on how these provisions may affect your tax situation

call me at 713-333-7477

or email me at jacob@thefinancialfirm.com

 

Any discussion pertaining to taxes in our web site (www.thefinancialfirm.com) may be part of a promotion or marketing effort. As provided for in circular 230 of the IRS, advice related to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor.

Posted 12/15/06