With the end of 2008 in sight, some people are thinking of giving away money and assets to lower their tax burden for the year. The IRS recently issued a press release noting some changes in tax law related to charitable contributions over the last few years, to help people make sure they get the tax benefit they are expecting in exchange for the gift.
Contributions of IRA Assets
For individual retirement account (IRA) owners who are older than 70½, the Pension Protection Act of 2006 allows a donation of up to $100,000 directly from the account to a qualified charity without first paying tax on the money or assets withdrawn from the account.
Normally, money saved and invested through a tax-deferred IRA account has to be declared as income in the year it is withdrawn and is taxed at the account holder’s ordinary income tax rate. This applies to both the original investment and any gain in its value, including capital gains. The IRS noted in its news release that under the 2006 law, money or assets must be transferred directly by the account trustee to the charity, on instructions from the account holder, in order to be excluded from income.
Any donation made under this provision can be counted toward the minimum required distribution that IRA owners must take each year after they turn 70½. However, the tax agency also noted that the donation is not deductible as a charitable contribution.
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Though the IRS didn’t mention this fact, a few states allow qualified charitable distributions from IRAs to be deducted for state income tax purposes. Donors should check with their tax advisers before counting on this deduction, to make sure their state is among those that allow the donation.
The agency also noted that not all charities are eligible to receive donations under this provision of the 2006 PPA. For example, donor-advised funds and supporting organizations don’t qualify.
The IRS noted that donations of money can be made in cash or by check, credit card, electronic transfer or payroll deduction. To take the contribution, the donor needs to have either a receipt from the charity or a bank record, such as a cancelled check, bank statement or credit card receipt. If you are audited, donations made by payroll deduction must be documented not only by pay stubs or W-2 wage statements showing the amount withheld but also with the pledge card showing the name of the charity.
The agency noted that check and credit card transactions are eligible for deduction in the year they are dated, even if the check doesn’t clear or the credit card bill isn’t paid until the following year.
Donations of Property
The IRS also noted that property worth less than $500 that is donated to charity must be in “good used condition or better” in order to be deducted. Household items, including furnishings, appliances and linens, worth more than $500 don’t have to be in good or better condition if the donor includes a qualified appraisal of the item(s) with the tax return.
When donating a motor vehicle, boat or airplane worth more than $500 to a charity, the deduction is limited to the gross proceeds from the charity’s sale of the item, the agency noted. However, according to the IRS Web site, in cases where the charity gives or sells the vehicle to a needy individual at a price significantly below fair market value in carrying out its charitable purpose, the donor can deduct the vehicle’s fair market value.
Happy new year!