CONTRIBUTION-RELATED CHANGES FROM 2006 ACTS

by J. Kenneth Nowell, CPA

WARNING - THIS IS NOT A COMPLETE LIST OF SAID CHANGES TO THE TAX LAWS, ONLY THOSE THAT WILL APPLY TO A SIGNIFICANT NUMBER OF READERS.

1. Are you 70½ yet? Will you be soon?  If not, skip   

     this item.  If so, READ ON!!

You now have the opportunity, at least through 2007, to dip into your IRA by making contributions directly from it.  Any such distributions directly to a charity will be excluded from income.  You may ask..."what's the big deal?  We already get to write off contributions!"  Anybody who has prepared a few income tax returns understands that there's a BIG difference between an itemized deduction and not having it count in income in the first place.

 

For one thing, consider this.  Can you deduct contributions on you CT return?  Nope...unless you make them right out of an IRA.  With this avenue, you are keeping your AGI, and thus your CT income tax, DOWN!  Another benefit is that by keeping your AGI down, you may be able to reduce the amount of Social Security benefits subject to tax.

 

And think about this...many healthy 70½+ people do not itemize, unless they give gobs to charity.  Now they can use this vehicle and effectively deduct such contributions by keeping them out of income, no matter how small the contribution.  And many others who are otherwise big givers have to worry about the 50% of AGI cap on deductible contributions.  You can give up to $100,000 through these direct contributions from IRAs.

 

Why 70½?  That's the magic age where those with the luxury of not needing to dip into their IRAs as of yet now HAVE TO, normally placing them in higher tax brackets from the minimum required distributions.  So now these required distributions (and then some, if desired) can be made to a charity, at least for 2006 and 2007 (we'll have to wait and see after that, given that Congress is in new hands).

Effective for contributions after 8/17/06, all clothing or household items must be in "good used condition or better" to be subject to a deduction.  The IRS has been directed to create rules to define such a condition, as well as rules that will deny a deduction for goods that have "minimal monetary value," such as socks and underwear (a GOP swipe at the Clintons?  You tell me!).  And any single clothing or household item valued at more than $500 will need to be supported by an appraisal, which will remove most incentive for valuing single items at values somewhat in excess of $500.

Also effective 8/17/06, the ability to use "other reliable written records (i.e. taxpayer-generated lists)" to substantiate cash or check donations will be history.  This further reinforces what I always advise clients...use checks where possible.  The one place where cash can still work for you is at church, as long as you are a member and use pledge envelopes that church personnel keep track of and report to you in periodic statements.  Now, only the check or written communication from the charity will suffice (and the receipt is STILL required for individual donations of $250 and more).

For tax years 2006 and 2007, a qualified conservation easement can create a deduction of up to 50% (up from 30%) of AGI.  For a qualified farmer or rancher, that limit shoots up to 100% of AGI!  One slight problem for farmers and ranchers...given that you also get other deductions,  personal exemptions and a block of income taxed only at 10%, you may not want to restrict so much land in one year as to allow you to write off all your income from this source of deduction.

There are also changes affecting property contributions by S Corporations, easements on certified historic structures, fractional interests in tangible personal property, recapture for donated property disposed within 3 years, taxidermy property, food inventory, what is a qualified appraiser, donor-advised funds, charitable remainder and split-interest trusts, and "supporting organizations."

Call your accountant with any questions!