When President Bush signed the Pension Protection Act of 2006 into law on August 17, Goodwill took note, and for good reason. Here are a few of those reasons.
Giving in Cash
For all cash contributions, donors are now required to maintain records, such as a receipt or letter from the organization or a cancelled check, in order to claim the charitable donation deduction. This provision is effective for contributions made in tax years after 2006. For contributions of $250 or more, no charitable deduction is allowed unless there is a written acknowledgement of the contribution by the not-for-profit organization. Goodwill and many organizations already provide records to assist contributors with documentation. If you normally give cash, consider writing a check to make things simpler for you and your favorite charitable organization.
Tax-Free Contributions From IRAs at 70 1/2
The most significant giving incentive in the law permits an individual older than 70 ½ years of age to distribute in tax years 2006 and 2007 up to $100,000 per year from traditional or Roth IRAs directly to charitable organizations (other than donor-advised funds, supporting organizations, or private non-operating foundations) without including the contribution in gross income for tax purposes. Contributions made to a charitable remainder trust will not qualify for the exclusion. Smaller amounts may be donated too. If you don’t need your IRA or the minimum distribution, consider donating it to your favorite charity. Although donating your IRA dollars directly to the charity may not create a tax deduction, it will create a tax reduction. Your accountant, attorney or charity will be able to help you with the details.
Clothing and Household Items
Most people at some point have items that are still usable, but no longer wanted. When deciding to donate used clothing and household items, keep in mind these operative words: clean, complete, and in sellable condition. The IRS says donated clothing and household items should be in good used condition or better and have meaningful value to the charity. As of August 17th, the IRS is empowered to deny a deduction for donated items with minimal monetary value. This rule will not apply to contributions of any single item of clothing or household item for which a deduction of more than $500 is claimed provided the taxpayer includes with their tax return a qualified appraisal of the contributed property.
How this will be enforced is yet to be determined, but the reason is pretty clear. The President’s Advisory Panel on Federal Tax Reform and the staff of the Joint Committee on Taxation have both concluded that the fair market value-based deduction for contributions of clothing and household items present difficult tax administration issues, and can be both fact and labor intensive for everyone involved. According to the IRS, the amount claimed in tax year 2003 for donated clothing and household items was in the billions. Simply put, if it’s in good condition, share it with Goodwill or your favorite charity and be conservative when putting a dollar value on your donation. If you are uncertain as to whether your donation is acceptable, ask first. At Goodwill we do recycle what we don’t sell. Remember, with a few exceptions, the donor, not the charity, is responsible for the amount taken as a deduction.
For those items that are truly valuable but not in good condition, like a damaged antique desk or mink coat, an appraisal may be necessary. If an item is not in “good used condition or better” and is worth more than $500, the taxpayer can obtain a qualified appraisal as an exception to the new rule. Further clarification is expected on this. At present, this is not an affirmative duty for the taxpayer to obtain an appraisal for an item in order to receive the tax deduction.
Limitation of the Tax Benefit for Property Not Used for the Charity’s Exempt Use
Tangible personal property contributed to a public charity for furthering its exempt purpose may be deducted by the donor at fair market value. However, the new law provides that if the charity disposes of the property within three years, and the charitable contribution deduction was in excess of $5,000, the donor is required to include as ordinary income (in the year of the disposition) the difference between the amount originally claimed as a charitable contribution for the donated property and the basis of the donated property at the time of contribution. The donor is not required to recapture the tax benefit of the deduction if the organization provides a statement to the IRS and the donor that the intended exempt use of the property became impossible or infeasible to implement. A $10,000 penalty applies to a person that identifies property as having a related use knowing that it is not intended for such use. The recapture provision applies to contributions made after September 1, 2006, and the penalty provision applies to identifications made after August 17, 2006.
Here’s an example. Donor GW contributes Babe Ruth and Mickey Mantle rookie baseball cards in mint condition to Goodwill, and Goodwill intends to sell the cards on www.shopgoodwill.org, using the proceeds to help fund Goodwill’s job training programs and its Veterans Home. The donor claims the cards are valued at $5,000 at the time of the donation; Donor GW originally paid $500 for them. By the second year, the cards haven’t sold and instead are framed for an office. What happens? In the year the cards became a part of the decor, Donor GW must include $4,500 as ordinary income on his tax return ($5,000 minus $500), unless Goodwill executes the certification previously described.
More Clarification Coming
Publications will be forthcoming from the IRS to help educate taxpayers. Other important provisions relate to fractional interest donations, donations of property for conservation purposes, food and book inventories, and favorable adjustment of basis for contributions by S Corporations. Organizations formerly not required to file Form 990 because their gross annual receipts normally don’t exceed $25,000 must now submit an annual electronic notice. And there is more.
This information is provided for informational purposes only and is not intended to replace expert legal or tax advice. Additional information can be found on the Exempt Organization website at www.irs.gov/eo. IBI