Pension Protection Act Includes New Rules for Charitable Giving

April 2, 2007

Don’t be fooled by its name. The Pension Protection Act of 2006, signed into law last August, includes a number of tax law changes that have nothing to do with pensions. Tucked into the pension act are several provisions related to charitable giving you should know about.

According to the Connecticut Society of CPAs, the law tightens the rules for donating clothing and household items and requires you to substantiate all monetary donations. On the plus side, the new law allows qualified individuals to make direct, tax-free contributions of IRA proceeds to charity.

Check Condition of Donated Items

Under the new law, effective after August 17, 2006, you may take a deduction for used clothing and household items only if the items you donate are in “good” condition or better. (The law does not define “good” condition.) For the purpose of this deduction, it includes such items as furniture, electronics, appliances, linens, and similar items (but not food, paintings, antiques, art objects, jewelry and gems, and collections).

There is one exception to the rule regarding the condition of donated items: You may claim a deduction of more than $500 for any single item, regardless of its condition, provided that you submit a qualified appraisal of the item with your tax return.

Start Collecting Receipts

The pension act includes stricter rules for deducting charitable donations. Beginning January 1, 2007, regardless of the amount of your donation, to qualify for a deduction, you must have a bank record, such as a cancelled check or bank statement, or a written communication from the charity. You do not need to mail in the documentation, but you will need to produce it if you are audited.

The bank record and/or written communication must indicate the name of the charity, the date the contribution was made, and the amount of the contribution. No tax deduction will be allowed if the taxpayer cannot provide any supporting documentation. Other written records do not qualify.

Make Donations from Your IRA

Under the Pension Protection Act, for distributions in tax years beginning in 2006 and 2007, if you are age 70½ or older and have an IRA, you can donate up to $100,000 each year from your IRA to charity. For married individuals filing a joint return, the limit is $100,000 per spouse. The distribution counts toward your required minimum distribution, but will not be taxable to you. To qualify, the distribution check must go directly from the IRA trustee to the charity. Under IRS interpretation, it also allows the IRA owner to hand deliver a check from the IRA made out to the charity. You do not need to itemize your deductions to take advantage of this provision.

No deduction is available for the amount given to the charity, but because the donation reduces your adjusted gross income, you may be able to claim deductions that would have been phased out or eliminated had the distribution been included in your income.

Consult with a CPA Before Making Fractional Gifts

There are new rules for deducting fractional gifts of tangible personal property, such as shares of artwork. The new rules, which took affect after August 17, 2006, are complex.

To better understand how the new rules affect you, contact your CPA.

Questions? Contact Mark Zampino at 860-258-4800, ext. 212 or markz@cscpa.org.