Charitable Donations Get Stricter Tax Rules
The nation's new pension law may have an unexpected effect on your ability to deduct charitable contributions.
The Pension Protection Act of 2006, passed this month, was aimed at shoring up the beleaguered defined-benefit pension system. But it includes a variety of unrelated provisions, including some that govern the type of proof that will now be required to claim tax breaks for gifts to charities, including cash and clothing given to organizations such as Goodwill and the Salvation Army.
The bottom line: Where the government once was willing to trust that you weren't padding the deducted value of small gifts, now you're going to need proof that you gave something -- and something of real value -- if you want to deduct it.
"I don't know if the Salvation Army kettle people are going to start giving receipts, but that's essentially what would be required if you wanted to claim the dollar you contributed as a deduction," said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.
Under current law, taxpayers are largely taken at their word when claiming $20 placed in the church collection plate, or the relatively minor amounts of out-of-pocket cash that they might throw into the Salvation Army's annual Christmas kettles.
Documentation has been required only for a donation of $250 or more. But, if audited, taxpayers are expected to supply a written record of how much they gave and to whom.
The new law, however, requires that taxpayers have a receipt or canceled check for every monetary donation. A taxpayer's written record is no longer enough.
"This is going to have a really big impact," said John Hewitt, founder of Liberty Tax Service in Virginia Beach, Va. "I know I give hundreds of dollars in small cash donations every year. Now, you won't be able to do that without getting a receipt."
Receipts or canceled checks do not have to be provided with a tax return, but can be demanded if the taxpayer is audited. If the taxpayer doesn't have the desired proof, deductions can be disallowed.
The bright side: For calendar-year taxpayers -- that's most of us -- the provision doesn't take effect until next year.
Rules on donations of old clothing and household items also were tightened up by the law, Luscombe said.
Deductions now can be taken only if the donated items are in "good" condition or better. Exactly what that means is a mystery; the law does not define good condition.
