Provisions for donating to charity have undergone some drastic changes with the passage of The Pension Protection Act. The first of these changes is in the substantiation rule. In the past, you only needed to get a receipt from a charity if you donated $250 or more. Under this current bill, no matter what the amount of the donation, you need a “bank record”, such as a cancelled check, credit card statement or a letter from the charity, proving that you actually made the donation. You don’t have to file the proof of donation with your income taxes; you just need to have documentation available if the IRS conducts an audit. If the taxpayer cannot prove the deduction, it would be disallowed. This provision takes effect in 2007.

The second change is in the provision regarding non-cash gifts. The IRS is trying to reduce the taxpayer tendency to over-inflate the value of donated items like clothing or household goods. The IRS can now deny deductions for items that are of limited cash value. The law specifies that these items must be in good condition or better. The catch here is that the IRS hasn’t defined the term “good condition.” As a result of this change, many charities are devising their own guidelines to help donators avoid problems down the road. One good example of the type of guidelines being developed can be found at http://www.lowcountrygoodwill.org/donate.cfm?id=8. If you are considering donating merchandise to any charity, it’s a good idea to check with the organization to learn if they have developed donation guidelines.

The third change is one that actually benefits taxpayers; however, the IRS hasn’t fully worked out all of the details yet. The Pension Protection Act allows taxpayers to donate money to charity directly from either their traditional or Roth IRA account. You can donate up to $100,000 per year, but the donation must be made directly from the IRA account to the charity. The distributions can only be made on or after the account holder turns 70 ½. The donation satisfies required minimum distribution rules applicable to these types of accounts. If the account holder meets these requirements, the distributions will be tax-free.

Such IRA distributions are only being permitted in 2006 and 2007. In addition, since the distributions will not be included in taxable income, taxpayers will not be able to claim a tax deduction for the charitable contribution.

Return To Index