Sweet (and Stringent) Charity

The new tax law both eases and tightens the rules on charitable contributions.  On the positive side, from now through 2007, taxpayers over age 70-1/2 can take tax free distributions of up to $100,000 per year from a traditional or Roth IRA to make a charitable contribution.

Suppose, for example, you are 72 years old and have pledged $50,000 to you alma mater’s building fund this year.  However, you don’t have that much ready cash and you’re not willing to disrupt your investment portfolio.

One option is to tap your IRA for the money to fulfill your pledge.  However, taking $50,000 from your IRA normally would generate $50,000 worth of taxable income.

It’s true that you’d also get a $50,000 tax deduction as an offset.  However, the offset might not be complete because of various limits on taking charitable deductions and the phase-out of itemized deductions faced by high- bracket taxpayers.

Under the new law, you could simply take $50,000 from your IRA and give it to your alma mater.  You would recognize no income and get no tax deduction. 

This tactic may be especially appealing to non-itemizers, who won’t be able to get a tax deduction for charitable gifts anyway.  You can make your normal charitable contributions, up to $100,000 a year, and pull untaxed dollars from your IRA to make those donations.

On the downside, such IRA-to-charity donations must be made directly to a charity.  They can’t go to a donor-advised fund or a supporting organization.

Easier easements

The new law also made deductions for conservation easements more available in 2006 and 2007.

You’d get such a deduction if you donate a restriction on future use of land that you own to a charity fostering preservation.  The deduction would be for the loss of property value, based on before-and-after appraisals.  Even after donating such an easement, you can sell the land or leave it to your heirs.

Under prior law, annual deductions for conservation easements were limited to 30% of your adjusted gross income (AFI); unused deductions can be spread over the next five years.  The new law raises this limit (temporarily) to 50% of AGI, provided the easement  does not prevent farming or ranching.

Cash concerns

Although the above provisions open up some charitable planning opportunities, other sections of the new law close down what the IRS perceived as abuses.  Going forward, all charitable deductions for cash gifts must be substantiated by a bank record or letter from the charity.  Such a letter must specify the date and amount of the donation.

This may have important implications for churchgoers who make regular contributions.   Obviously, it’s impractical to get  receipts or letters of acknowledgment.

Instead, make a pledge and write checks, perhaps every month.

Also, charitable donations for household items such as clothing will not be permitted unless the articles are in “good” condition, a quality that is not defined.  (Single items appraised at over %500 are assumed to be “good,” so they qualify.)  You might want to take photos of items you are donating, to support deductions for non-cash contributions. 

These provisions became effective after August 17^th, 2006, the date of enactment, so they currently apply to charitable contributions  of cash and household goods.