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CCH can assist you with stories, including interviews with CCH subject experts.
Also, the 2007
CCH Whole Ball of Tax is available in print. Please
contact:
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
Neil Allen
(847) 267-2179
neil.allen@wolterskluwer.com
Link to special CCH Tax Briefings on key topics from 2006:
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2007 CCH Whole Ball of Tax
Help the World, and Self, to a Charitable Tax Break
(RIVERWOODS, ILL., January 2007) – Charity can be doubly rewarding when
you help yourself – on your tax return – as well as helping a worthy
cause. And when it’s a matter of whether your donations truly count for
tax purposes, you should be aware of some restrictive new rules – and
a new opportunity – according to CCH, a Wolters Kluwer business and a
leading provider of tax and accounting law information, software and services
(CCHGroup.com).
“Although there is support for expanding the ability to deduct charitable
contributions, on balance, recent tax legislation has tightened the rules,” said
Mark Luscombe, JD, LLM, CPA and CCH principal federal tax analyst. “For
example, despite efforts to create an ‘above the line’ charitable
deduction that could be used by people who can’t itemize, charitable
contributions can currently only be taken as itemized deductions.”
In fact, the rules for claiming even that deduction have been progressively
tightened in the last few years. Beginning in 2004, the law has required that
you have a receipt for any donation of property valued at more than $250.
Since 2005, taxpayers who give a car valued at over $500 to a charity have
had to meet stringent substantiation requirements. They must obtain a form
from the charity identifying them as the donor and list their Social Security
Number and the vehicle’s identification number. The taxpayer is required
to attach this statement to his or her return. If the charity sells the vehicle
without using it or fixing it up – which is the most common practice – the
statement must also certify that the vehicle was sold in an arm’s length
transaction between unrelated parties, list the gross proceeds and state that
the deduction may not exceed the gross proceeds.
“There was a strong suspicion that people were greatly inflating the
value of cars they donated to charity, claiming the top Blue Book price for
clunkers that had to be towed away,” Luscombe observed.
New Substantiation Requirements
Last year, the Pension Protection Act included new substantiation requirements
among its tax provisions. One of them, effective for donations made after August
17, 2006, denies a deduction for any household items or clothing that is “not
in good used condition or better,” unless it includes a deduction for
a single item with an appraised valuation of more than $500.
“An expensive designer dress might qualify even if it has a rip,” Luscombe
said. “But in general, you can’t claim a deduction for things that
are going straight to the rag bin. The interesting question is just how the
IRS will define ‘good used condition or better.’”
Kettle Contributions Won’t Count
The same law made 2006 the last year in which people can estimate the amount
of their cash contributions under $250. For 2007, every deduction for a cash
contribution of any amount must be substantiated by a bank record such as a
cancelled check or by something in writing, such as a receipt or letter from
the donee indicating the name of the donee organization, the date the contribution
was made and the amount of the contribution.
This would seem to deny a deduction for many popular ways to contribute to
charity, beginning with the Salvation Army kettle and money placed in a collection
plate.
In fact, Congress may have made the law too restrictive, with the language
of the statute denying a deduction for contributions that are clearly legitimate
and verifiable. The IRS has already said that it will accept payroll records
and pledge cards as substantiation for charitable donations made through payroll
deductions, even though these don’t meet the exact requirements of the
new law. But what about donations to literacy programs or food pantries made
by adding a few dollars to your bill at the bookstore or grocery?
“I suspect that a receipt showing that kind of donation will be accepted
even though it comes from the store, not the charitable organization,” Luscombe
said. “This may come through an IRS ruling or from clarifying legislation,
but I think it will come one way or another.”
What Counts, What Doesn’t
The latest substantiation requirements come on top of a number of long-established
rules limiting what counts as a charitable donation.
You cannot deduct any contributions made to specific individuals, political
organizations or political candidates; the value of your time or services;
tuition costs or the cost of raffle tickets. If you buy a lot of raffle tickets,
however, you may be able to claim a deduction for gambling losses. (But, you
can only deduct gambling losses to the extent of your gambling winnings.)
What Organizations Qualify?
Giving to a worthy not-for-profit organization doesn’t necessarily mean
you can declare a deduction. To be deductible, contributions must be made to
qualified organizations. These are organizations to which the IRS has granted
170(c) status and usually include charitable, religious, educational, scientific
and literary organizations.
Contributions made to other not-for-profit organizations, such as trade associations,
labor unions, political parties, civic leagues and hobby clubs cannot be deducted
as charitable contributions. For those unsure of whether or not the organizations
they have donated to are “deductible,” the IRS posts a listing
on its web site of all organizations that have 170(c) status.
Time, Travel, Housing
Although you cannot deduct the time you devote to a charity, you can deduct
the expenses you incur while contributing your services to a qualified organization.
For example, if you use your car to deliver meals to the homebound, you can
deduct your mileage.
Other expenses that can be deducted include out-of-pocket expenses and transportation
costs, meals and lodging while away from home. However, travel costs may only
be deducted if there is no significant amount of vacation time taken in conjunction
with your charity travel. For 2006, auto expenses for transportation related
to charitable work can be claimed at 14 cents per mile, but travel specifically
related to Hurricane Katrina relief work is eligible for a higher rate: 34
cents per mile.
Another special Katrina-related inducement to charitable deeds allows taxpayers
who took in evacuees for more than 60 days in 2005 or 2006. They can claim
an additional $500 exemption on their tax return for each person they took
in, up to $2,000 for both years.
Benefit From Donating Appreciated Property
When donating qualified stock and other assets, such as real estate that has
appreciated, you can deduct the fair market value as opposed to what you initially
paid for the asset.
“By making charitable donations from their stock portfolios, taxpayers
can take a deduction based on the current value of the stock and avoid the
capital gains taxes they would have to pay if they sold the stock,” Luscombe
noted.
When You Get Something of Value
If in return for a contribution you receive goods or services, such as a dinner,
theater tickets or a golf outing, you can deduct only the amount that exceeds
the fair market value of the benefit you received.
For example, if you contributed $100 to attend a charity fundraiser banquet,
you can only deduct the amount that exceeds the actual cost of the meal provided.
Therefore, if the fair market value of the dinner was $35, you can only claim
$65 as a charitable contribution.
If your contribution to a charity has a value in excess of $75, and you get
something substantial in return, the organization is required to provide you
with a written disclosure statement. This statement should state the value
of the goods or services the charity provided and the amount you donated that
is deductible on your federal income tax.
A New Opportunity
New for the 2006 and 2007 tax years is a special opportunity for some seniors
to avoid paying income tax on distributions from IRAs. Since most IRA distributions
are taxable, and since they must begin, in specified amounts, when an IRA owner
reaches age 70½, some seniors find that they have to pay tax on income
that they don’t really need.
They can avoid the tax by making a distribution of up to $100,000 directly
to a charity. They can then exclude the amount of the distribution from their
income.
“It’s very much as though the distribution never took place, from
a tax perspective,” Luscombe explained. “The charity gets the money,
but the distribution is not counted as income. It doesn’t get taxed,
and it doesn’t increase the taxpayer’s adjusted gross income, which
can lead to further tax benefits.”
The new law doesn’t allow a double benefit – you can’t exclude
the distribution from your income and then also take an itemized deduction
for it. The big question that hangs over this new tax provision is whether
it will be renewed beyond 2007.
“Charities will no doubt urge that this be made a permanent part of
the tax code, but it seems to give a tax break to people who almost by definition
don’t need the money from their IRA distributions,” Luscombe noted. “The
new Congress may decide that other tax policies have a higher priority.”
Other
Ways to Give
While writing a check to a favorite charity and taking a deduction for it
is the simplest way of benefiting your favorite cause and limiting your tax
liability, there has been an increase in recent years of using intermediate
vehicles that offer more benefits, or more flexibility, while achieving the
same purpose.
Charitable remainder income trusts allow individuals to set up a trust naming
a charitable organization as the beneficiary. Under the trust, you receive
the interest income during the remainder of your life, while the charity receives
any remaining income you did not withdraw during your lifetime as well as the
principal when you die.
“Rather than waiting until after your death to leave money to a charity,
these trusts offer you a lifetime use of the property, but allow you to declare
a charitable deduction for the present value of the charitable interest,” said
Luscombe.
Donor advised funds offer similar benefits, but instead of donating directly
to a charity, you place your money in a fund. You can then advise the fund
to make distributions to charities of your choosing, or offer advice as to
how the funds are invested.
“There has been some concern about donor advised funds being used to
benefit family members, among other things, and last year’s legislation
contained some new restrictions on them,” Luscombe noted. “People
interested in vehicles such as charitable trusts and donor advised funds should
consult with a competent tax advisor before they make the significant financial
commitment that is usually required.”
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax
and accounting law information, software and services. It has served tax, accounting
and business professionals and their clients since 1913. Among its market-leading
products are The ProSystem fx® Office, CCH® Tax
Research Network™,
Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is
based in Riverwoods, Ill.
Wolters Kluwer is a leading global information services and publishing company.
The company provides products and services for professionals in the health,
tax, accounting, corporate, financial services, legal and regulatory, and education
sectors. Wolters Kluwer has annual revenues (2005) of €3.4 billion, employs
approximately 18,400 people worldwide and maintains operations across Europe,
North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam,
the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and
are included in the AEX and Euronext 100 indices. For more information, visit
www.wolterskluwer.com.
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