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17 August | 2006
The Pension Protection Act of 2006
New Rules for Cash Donations of Any Amount
The new law completely disallows any deduction for a charitable donation of cash, a check, or any other
monetary gift unless the donor has either: (1) a bank record (such as a cancelled check) or (2) a written
communication from the charity that adequately documents the donation. Previously, the regulations allowed
cash donations of less than $250 to be substantiated with "reliable records," which could include something
other than bank records or donee acknowledgment. Also, the Courts allowed taxpayers to use the Cohan rule
to estimate their cash contributions (e.g., a weekly church contribution). This will no longer be allowed.
This unfavorable change is effective for tax years beginning after the new law's date of enactment. The existing
requirement to obtain charity-provided documentation of donations of $250 and above continues to apply. Smaller
cash donations will now fall under the new rule explained above.
Tighter Rules for Donations of Used Clothing and Household Goods
The new law completely disallows deductions for most donations of used clothing and household goods that are not
in "good used" condition or better. In other words, no more write-offs for "junk." However, the new law doesn't
define what "good used" means. "Household items" include furniture and furnishings, electronics, appliances,
linens, and similar items. An exception allows deductions for single items that are appraised at more than $500,
even if they are not in "good" condition. This unfavorable change is effective for donations after the new law's
date of enactment.
Temporary Allowance of Donations Directly out of IRAs
The new law allows an individual who is age 70½ or older to claim tax-free treatment for otherwise taxable 2006
and 2007 distributions, from traditional or Roth IRAs, paid out to certain tax-exempt charities. However, there
is a $100,000 annual cap on such "qualified charitable distributions." Under the rules before the 2006 Pension
Act (which will kick back in after 2007), an individual who wanted to contribute money from an IRA to a charity
had no choice but to: (1) take a distribution, (2) include the taxable amount in his or her gross income, (3)
give the distributed cash to the charity, and (4) claim an itemized deduction for the donation. Because of
limitations on charitable donation write-offs, however, the amount and timing of allowable deductions did not
necessarily fully offset the current taxable income triggered by IRA distributions. The 2006 Pension Act fixes
that problem, but only temporarily.
To be a qualified charitable distribution, payment must be made by the IRA trustee directly to Section
170(b)(1)(A) charitable organization that is not an organization described in IRC Sec. 509(a)(3) or a donor
advised fund defined by IRC Sec. 4966(d)(2). Basically, this means garden-variety public charities.
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