The Pension Protection Act of 2006 is aimed at improving defined benefit plans, but it also contains important unrelated changes affecting charitable contributions. Some of these contribution rules will affect practically everyone.
Under current law, taxpayers are not required to obtain a receipt for contributions under $250. Effective January 1, 2007 (for calendar year taxpayers), receipts are required for every contribution, regardless of the amount. So if you throw in cash in the Sunday collection plate, or into the Salvation Army’s Christmas kettles, you will not be able to take a charitable contribution unless you get a receipt, or have a cancelled check.
Deductions for contributions of used clothing, household items or other property are also tightened. Effective August 17, 2006, deductions of property are allowed only if the item is in “good” condition, a term that is not defined. Property that is in less than “good” condition can only be deducted if the property s worth more than $500, and then the value must be supported by an appraisal. As a result, receipts for property contributions will need to be more detailed, with the charity stating the property’s condition.
Effective upon enactment, penalties for overvaluation of donated property are expanded by lowering the threshold for the imposition of penalties. Donated property that is overvalued by 150% or more is subject to accuracy related penalties. Higher penalties occur when property is overvalued by 200% or more. Similar penalties are imposed on undervalued property for estate and gift taxes.
As before, appraisals are needed for donations exceeding $500. Appraisers are now also penalized in connection with a tax return that contains such an overstatement. Expect a more difficult time in obtaining appraisals that support the tax position that you wish.
Other changes in charitable contributions with a less widespread effect include:
- Those 70 ½ and older can now donate up to $100,000 a year from their retirement plans without first including the related income in adjusted gross income (and hence triggering other adverse tax consequences). This provision relates to 2007 and 2008 only.
- Taxpayers that give conservation easements to conservation groups can now deduct greater amounts. The annual deduction is increased from 30% to 50% of adjusted gross income. Excess contributions can be carried forward for up to 15 years. Prior law allowed only a five-year carry forward, which when combined with the prior annual 30% restriction meant that some deductions were never allowed. The new 50% limit is eliminated entirely for eligible farmers and ranchers. These provisions expire at the end of 2007.
- Personal property contributions that are not used for the charity’s exempt purpose can still be donated at the property’s fair market value. However, if the charity disposes of the property within three years and the deduction was over $5,000, the donor will have to report as income in the year of disposition the difference between the amount originally claimed as a charitable contribution, and the basis of the donated property.
- Charities receiving a fractional interest in personal property (e.g., a painting) must take complete ownership of the item within 10 years of contribution or the death of the donor, whichever first occurs.
These changes are expected to raise significant taxes. Although the amounts involved on individual tax returns is usually not great, numerous small amounts on a large number of tax returns can add up to billions of undeserved deductions.