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Pension Protection Act: New rules for charitable giving

Money Management

Monthly financial advice
from the MACPA

For release: April 2007

Don’t be fooled by its name. The Pension Protection Act of 2006, signed into law in August 2006, 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 Maryland Association 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 Aug. 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, 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 Jan. 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.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.

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