Charitable IRA Rollovers
For tax years 2006 and 2007 only (so far), an IRA owner aged 70 1/2 may make a direct transfer of IRA funds, up to $100,000, to an eligible charity. The amount transferred effectively bypasses the tax return as it is not taxed as income, but neither is a deduction taken for the contribution. The amount transferred counts towards your Minimum Required Distribution. There are several advantages to this:
- Taxpayers need not itemize their deductions to take full advantage of the tax break.
- The tax benefits of the transfer are not limited by the percentage of Adjusted Gross Income (AGI) limits normally associated with charitable contributions. (Normally, contributions to public charities are limited to 50% of AGI).
- The monies do not increase your AGI (as would be the case if they were received as income and then taken as a deduction). This means they will not contribute towards the phase-out of the itemized deduction and, conversely, will lower the threshold for miscellaneous and medical deductions.
Needless to say there are rules to follow:
- Funds must be contributed directly by the IRA trustee to the charity
- Employer plans (401(k), 403(b), SIMPLE IRAs, SEPs) are not eligible though, of course, once rolled over to a traditional IRA, the funds become subject to IRA rules.
- Donor Advised Funds and Supporting Organizations are not eligible recipients
Guidelines for Cash Donations Changing
Beginning with tax year 2007 (earlier if your tax year started before January 1), the IRS will no longer just take your word for it (even if you're keeping notes or a diary) that you dropped a couple of bucks into the collection plate or Salvation Army kettle. The new rules state that donations of cash or by check, electronic funds transfer, credit card or payroll deduction must be backed up by a "bank record or a written communication from the charity showing the name of the charity, the date, and amount of the contribution." A bank record includes:
- A canceled check
- A bank or credit union statement provided the statement shows the name of the charity, date, and amount as required above
- A credit card statement showing the name of the charity and the posting date
- Payroll deductions require the pay stubs, W-2, or another employer-provided document along with a pledge card showing the name of the charity.
Guidelines for Non-Cash Donations Already Changed
For clothing and household items donated after August 17, 2006 to be deductible, they must be in "good used condition or better". The exception to this is that any single item valued at $500 or more may be deducted, regardless of condition, provided a qualified appraisal is included with the tax return.
For more information and details, see recent IRS news release IR-2006-192. Note: IRS Publication 526, Charitable Contributions, has not yet been updated.