Charitable Contributions:

What’s New in the Tax Code?

Although Congress has been active in the past few years enacting laws to curtail overstated and unverified contributions, the tax code still contains incentives to encourage contributions to approved charitable organizations. However, tax deductions must be itemized in order to deduct a charitable contribution, which means that there is no tax benefit gained if the standard deduction is taken. Consider “bunching” your contributions in one year, so that you can itemize and then take the standard deduction the next year. For most contributions, the maximum that can be deducted in a year is 50% of a taxpayer’s income (AGI). There are lower limits for gifts to fraternal organizations, private foundations and contributions of capital gains property.

Although there are stricter rules after August 17, 2006, the fair market value of used clothing and household items donated to a qualified charity can still be deducted, provided that the items are in good or better condition, do not include items of minimal value, and written documentation is obtained from the charitable organization verifying the contribution. Donating vehicles may be severely curtailed, but it is still allowed. Keep in mind that if the vehicle’s claimed value is in excess of $500, the deduction is limited to what the charity actually obtains from its sale. IRS Form 1098-C (or equivalent substitute statement) must be attached to the taxpayer’s return to indicate what the charity received for the vehicle. On the other hand, if the charity actually keeps and uses the vehicle in its charitable function, or sells it at a low price to a needy family, the fair market value of the vehicle may be deducted.

A provision expiring at the end of 2007 allows taxpayers age 70-½ and older to have their IRA trustees make direct transfers of IRA funds (up to $100,000) to a qualified charity. The distribution is not treated as income on the donor’s tax return, but no charitable deduction is taken for the transfer. The distribution to the charity counts toward the year’s required minimum IRA distribution amount. For someone whose contributions allow him or her to marginally itemize–or who don’t itemize–this can be a big benefit since the individual’s income (AGI) is lower without the IRA distribution. This may lead to reduced taxes on Social Security income, marginal tax rates, capital gains rates and phase-out limitations, which adds up to a lower tax for the year.

A capital asset (stock, land or improved property) that has appreciated in value can be contributed to a taxpayer’s favorite charity, and the fair market value of the asset can be deducted rather than the cost of the item. This allows the taxpayer to avoid the gain from the sale of the property, but still deduct its full value. There are, however, certain deduction limitations for the year, with the excess carried over for five years.

The most important factor to keep in mind is that ALL charitable contributions that you plan to deduct require either written verification or a bank record, beginning for the 2007 year.

Cash dropped in a pot or collection plate is no longer deductible. Solution…always use a check or credit card or get a receipt.

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