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 Beginning in the tax year of 2007 there were several important changes made to the tax code concerning gifts to a charity. There were also some significant tax breaks for IRA owners if they're willing to transfer funds to charitable organizations in the tax years of 2006 and 2007.
In this article we're first going to discuss some of the new guidelines the IRS has issued with respect to charitable donations and recordkeeping requirements. In addition to the change in guidelines dealing with donating money, there was a change in the rules regarding the donation of clothing and household items. Finally, we'll discuss briefly the tax break for IRA owners that are interested in transferring money to eligible charities.
New Guidelines for Charitable Donations
As part of the Pension Protection Act, the IRS has gotten tougher when it comes to claiming gifts to charity on income tax returns. Prior tax law allowed taxpayers to substantiate their donations of money to charity using personal bank registers, diaries, or even notes made around the time of the donation. Starting in 2007 those types of records are no longer sufficient.
To deduct a donation of money, a taxpayer now has three mechanisms they can use as proof of the donations:
- Bank Records - a bank record would include canceled checks, credit card statements, or a statement from their bank or credit union showing the name of the charity, date and amount of donation. Credit card statements need to show the transaction posting date as well as the name of the charity.
- Written Communication - all written communications received from the charity must show the name of the charity, date, and contribution amount.
- Payroll Deductions - if a taxpayer wishes to deduct a donation made via regular payroll deductions, they will need to retain their pay stub, IRS Form W-2, pledge card, or another document provided by their employer that shows the charity's name, the date, and the amount of the donation.
Please note that the above IRS requirements no longer include written logs, diaries, or notes made by the taxpayer at the time of donation. As mentioned earlier, these types of records are no longer considered sufficient proof of the donation's value.
Donating Clothes and Household Items
Clothing and household items donated after August of 2006 must be at least in "good" used condition. Unfortunately, the tax law does not explain, or define, the term "good" used condition. Household items include furniture, furnishings (such as wall art and lamps), electronics, appliances, and linens.
An exception to the above rule involves items valued at more than $500. Donated items worth $500 or more can be deducted as long as a qualified appraisal accompanies your tax return.
Contributions in Excess of $500
In addition, all non-cash contributions valued at more than $500 require you to file tax Form 8283 specifying the date the item was originally acquired, original cost, date of contribution, fair market value, as well as the method used to determine the item's fair market value. Donations of items such as cars, boats, art, and jewelry valued at more than $5,000 have even more rigorous filing requirements.
Existing Guidelines for Donations to Charity
The change in tax law did not modify the prior IRS requirement that a taxpayer get an acknowledgement from a charity for each deductible donation of $250 or more - which applies to both money and / or property. That being said, it is possible to use one statement, containing all of the necessary information, to meet the requirements of both tax law provisions.
Deducting Gifts to Charity
If you're making a donation, or giving a gift of money or goods to a charity, you should also be aware of the following rules which apply to claiming donations on an income tax return:
- Timing of Deductions - contributions are only deductible in year in which the donation is made. Checks that are mailed or credit card donations that are made before year-end are eligible for deduction in that tax year even if the check is not cashed or the credit card bill is not paid prior to year's end.
- Qualified Organizations - donations are deductible only if made to qualified organizations. You can find a list of qualified organizations online in IRS Publication 78. Churches, synagogues, temples, mosques, and government agencies are considered qualified organizations even if not listed in Publication 78.
- Itemization of Deductions - only taxpayers who are able to itemize their deductions on Schedule A are able to claim a deduction for items or money donated to charity. Taxpayers filing their Form 1040 using a standard deduction are not eligible to claim a gift to charity.
Tax Breaks for IRA Owners
The following tax break was / is available only in the tax years 2006 and 2007. Under this provision, IRA owners age 70 1/2 and over can now contribute or transfer up to $100,000 per year to eligible organizations without paying any tax on the monies transferred. Taxpayers can take advantage of this tax break even if they do not itemize their deductions.
To qualify, the money must be transferred directly from the IRA trustee to the charity. These donations are counted in determining whether or not the IRA's owner had met all their minimum required distribution rules. Distributions from employer sponsored plans such as a SIMPLE IRA and simplified employee pension plans (SEP) are not eligible for transfer.
If done correctly, the amount donated will not be included in the donor's gross income which prevents the donor from being penalized on their income taxes. The amounts transferred are neither taxable nor is a deduction taken for the amount given to the charity. This change in tax law is simply a more efficient way for donors to remove money from a taxable IRA and donate it to charity.
About the Author - Charity Gifts and Taxes
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