As we noted a few months ago, the Pension Protection
Act of 2006 made quite a few changes to the laws regarding
charitable contributions. It appears that Congress believes that
there is way too much "slop" being reported as charitable
contributions, and the IRS is only too happy to diligently enforce
their revamped distinctions on charitable giving.
Last year, the rules for donating a vehicle changed substantially.
While the statistics for the 2005 tax filing year (the first year in
which the new rules were put into place) have not yet been
published, expect to see a significant drop in the charitable
contributions of autos, boats, and the like. It appears that quite a
few taxpayers out there were making bogus claims and overstated
valuations on donated autos.
In essence, under the new rules, if you donate a motor vehicle to a
charitable organization, your deduction is limited to the amount
that the charity receives when it sells the vehicle -- regardless of
the Kelley Blue Book value. Additionally, the charity must provide
you with Form 1098-C reporting the amount of the sale. If you don't
receive a Form 1098-C from the charity, it's virtually certain that
you'll have no tax deduction. If the charity does not sell the
vehicle, but uses it in their charitable activities, then the "fair
market value" is allowed for the deduction. Still, the charity is
required to issue Form 1098-C to you for your records, and to advise
you of how it used (or sold) the vehicle.
Because of these law changes, many charities have gotten out of the
auto donation business, and many more taxpayers have decided to
sell, rather than donate, their old clunker.
It seems that Congress, encouraged by the 2005 law changes, decided
to excise even more questionable charitable contributions on the tax
Starting Jan. 1, 2007 for calendar-year taxpayers, you have two sets
of rules to follow: those for cash/check contributions of $250 or
greater, and those for less than $250. For contributions greater
than $250, you must have a written acknowledgement from the
charitable organization to be deductible, as per previously existing
laws. For those under $250, you still must have some sort of
receipt, or you'll receive no deduction. A cancelled check will do,
as will a written acknowledgment from the charity. But if you have
neither of those, you have no deduction.
That $20 bill that you put in the church plate? Gone. The $5 bill
that slipped in the pot of a Salvation Army volunteer? Gone. Make no
mistake -- in 2007, records or receipts of charitable contributions
But the biggest change applies to non-cash charitable contributions
made after Aug. 17, 2006. Non-cash contributions include those old
undergarments, worn-out socks, stained blouses, and other "stuff"
you give to a charitable organization. Congress seems to think that
most of these items are donated because they have no value
whatsoever. I guess they never heard the phrase, "One person's trash
is another person's treasure." Nevertheless, any non-cash
contribution made after this past Aug. 17 must be in "good used
condition or better."
Sadly, the IRS has yet to define the term "good used condition or
better," so the taxpayer will have to be diligent in the specifics
of the goods donated and their condition. I am strongly recommending
that my clients take digital pictures of all clothing and household
goods donated, with specific reference to their current condition.
Obviously, if it looks good, it'll more likely stand up under review
or examination by the IRS. Additionally, if it doesn't work, no
deduction will be allowed ... no matter how good it looks. The good
old days of simply getting a donation receipt for goods with no
specific documentation of what was given, or the condition of the
items, are long gone.
A number of very good computer programs can help you with the
valuation of your non-cash contributions. However, before you spend
the money on one of these programs, why not check out the Salvation
Army valuation site? You might find enough help here to claim the
appropriate fair value for your donated items. However you decide to
do it, you'll be required to be much more careful in the future when
it comes to non-cash contributions.
Be aware of the changes ahead regarding charitable contributions.
Giving to charity is the right thing to do, and it benefits society
as a whole. Don't stop donating just because Congress has ratcheted
up the reporting requirements. Instead, understand those
requirements, follow them, and know when your tax return is finished
that your charitable contribution deductions will stand up to IRS.
When he's not dealing with tax issues, Fool contributor Roy Lewis is
a motivational speaker who lives in a trailer down by the river. He
understands that The Motley Fool is all about investors writing for
investors. You can take a look at the stocks he owns as long as you
promise not to ask him which stock to buy. He'll be glad to help you
compute your gain or loss when you finally sell a stock, though.
By Roy Lewis (TMF Taxes)
November 17, 2006