New Pension Act Affects Charitable Giving

espite its name, the recently enacted Pension Protection Act of 2006 also addressed a number of other areas of taxation. A segment of this law created some new rules for individuals who donate cash and certain other types of property to charities.

MORE DOCUMENTATION
For many years, the government has been concerned about perceived abuses involving charitable contributions and has taken steps to curtail questionable practices related to specific types of property. (For a discussion of the rules related to contributions of automobiles, see “ New Rules for Vehicle Donations, ” JofA , Jun.2006, page 86.) Congress’s latest effort has resulted in provisions that require more specific substantiation from individuals giving money and household goods.

MONETARY GIFTS
Previously, the documentation needed for cash contributions (including by check and credit card) depended on whether the amount was less than $250. If under $250, recordkeeping was minimal; if $250 or more, the taxpayer had to have a written acknowledgment from the charity that included certain information.

New requirements. Beginning in 2007, all cash gifts, regardless of amount, must be substantiated by a bank record or a written communication stating the charity’s name and the amount and date of the contribution. In addition, self-created records (such as logbooks), which previously could be used to document small donations, will not be accepted.

Essentially, this new rule will probably encourage contributors to make many more donations by either check or credit card, as the cancelled check or statement will satisfy the requirements. In addition, because many taxpayers will be reluctant to make a cash gift (regardless of the amount) if they do not receive the necessary paperwork, charities may be forced to provide more receipts or acknowledgments.

CLOTHING AND HOUSEHOLD ITEMS
Generally, taxpayers may take a deduction equal to the fair market value of clothing and household items contributed to charities. To substantiate the deduction, a taxpayer must obtain a receipt from the charity showing the name of the organization, the date and location of the gift and a detailed description of the property donated.

“Good” condition. Deductions for donations of clothing and household goods (that is, furniture, pots, pans, dinnerware, sheets, blankets, home furnishings, electronics, appliances and similar items) made after August 17, 2006, will be allowed only if the items are in “good used condition or better.” Household items do not include food, paintings, antiques, art objects, jewelry and gems and similar collectibles.

The new law does not define “good used condition or better.” Taxpayers will need to look at the criteria set by the various charities accepting these items. However, an individual may claim a charitable deduction even if the contributed clothing or household item is not in good used condition if the deduction exceeds $500 and he or she includes a qualified appraisal.

For more information on these new provisions, see Tax Clinic, “PPA ’06 Addresses More than Pensions,” by Heather J. Leggerio, CPA, JD, in the November 2006 issue of The Tax Adviser.

—Lesli S. Laffie, editor
The Tax Adviser