Changes in Charitable Donation Rules

Published November 25, 2006 (published version was edited to shorten size)

Are you planning on making some additional 2006 charitable contributions before the year closes out? Here are some changes regarding donations that took affect August 17 of this year that you may want to take into account.

First off, don’t expect to write off minimal cash donations, such as to the Salvation Army kettle. This was Okay before, but not anymore. No matter how small, a receipt or a cancelled check must now document cash gifts in order to generate a deduction.

A second change is that gifts of clothing and household goods must be in “good or better condition” before any deduction can be taken. Generally you can claim a deduction for the fair market value of gifts in kind. At last count, clothing and household goods accounted for over half of such gifts reported and Congress thinks that a lot of the values have been inflated. This is a follow-up to their targeting vehicle donations a few years ago. At that time they limited taxpayers’ deductions to the selling price after the charity sold the vehicle. Of course, vehicles are a little easier to trace than a bag of clothing or your old couch.

To get a realistic idea of what your stuff is worth, you may want to look at the valuation guide on the Salvation Army website. You may also want to take pictures of those items that you are donating to substantiate your deduction. I expect that this new clarifying language will not slow down the perceived abuse one bit and that Congress will simply take away the thrift shop deduction at some point.

The biggest change in the charitable giving rules is the new provision allowing taxpayers over 70 1/2 years of age to give directly to a charity from their IRA. The maximum is $100,000 per taxpayer and it can be done in both 2006 and 2007.

This change is great because it gets money out of an IRA without needing to report it as income. One thing certain about most retired people is that they hate paying income taxes. Having saved for their retirement, they think that taxes should stop at the same time they stop working. Eventually many find out that the IRAs they have accumulated are the most taxed of all assets.

Coasting along in retirement while their IRA investments grow, many are suddenly faced with mandatory distributions for the first time at about age 70 even if they don’t need the funds. This extra income plays havoc with their tax returns since it increases the likelihood that Social Security benefits will be taxed, etc. Even giving the proceeds to charity does not help much since the income must still be reported. In addition, most retirees don’t itemize and need to exceed the generous standard deduction limits to get a tax benefit.

Charities have always wanted to tap into the IRA treasure chest and this innovative approach allows this to happen without any tax pain or complications at all. Be sure to plan ahead on this, since funds must go directly from your custodian to the charity and this could take time to sort out.