New pension law closes loopholes in charity deductions



If you donate old clothes and stuffed animal heads to charity, or even if you just throw a few bucks into the Sunday collection plate, Congress thought about you in the new pension law.

As part of the legislation that exceeds 900 pages, Congress added tax perks to encourage charitable giving while closing loopholes abused by more creative donors. President Bush signed the pension bill into law Thursday.

Here are some of the changes in store for donors:

No trash, please. Americans claimed more than $9 billion in deductions for donations of clothing and household items to charities in 2003, according to the IRS. From now on, they'll get a tax deduction only if these donations are in "good used condition or better."

"It's my sense that [legislators] think a lot of people are wearing this stuff to rags and giving it to charity and claiming a deduction as if they just bought it off the rack," said Mark Luscombe, a principal with CCH Inc., a provider of tax information in Illinois.

Congress also authorized the IRS to come up with regulations to deny deductions for gifts of minimal value, such as used socks and underwear. This might be called the Bill Clinton provision. When governor of Arkansas, Clinton reportedly donated old underpants to the Salvation Army, claiming a deduction of $2 per pair.

Congress carved out an exception to the rule that items must be in good shape. You can still get a tax deduction for shabbier clothing or other household goods as long as the item is worth more than $500 and you have an appraisal on it.

"Maybe these days someone would pay $500 for Bill Clinton's underwear," Luscombe said.

Proving small donations. Do you throw $5 each week into the church collection plate or give $10 to a colleague's annual bowl-a-thon? Maybe you just added them up and deducted these donations on your tax return. Beginning next year, that will no longer be possible, said Bill Fleming, a managing director with PricewaterhouseCooopers in Hartford, Conn.

Individuals will need to document even small gifts of cash if they want to deduct them on tax returns. Proof can be either a canceled check or a thank-you letter acknowledging the size of the gift and the date, Fleming said. Up to now, only donations of $250 or more needed such a letter.

Tap an IRA for charity. To encourage giving, the new law allows older investors to make donations from an individual retirement account to a charity without getting bitten by taxes.

Until now, if people took money out of a traditional IRA to make a donation, the withdrawal would be reported on their tax returns as part of adjusted gross income and be subject to regular income tax.

They then could deduct their charitable gift on their itemized return.

But under the new law, investors who make contributions directly from the IRA to a charity won't have to pay income taxes on the money. (They don't get a tax deduction on top, though.)

"Charities will have a big push on this, for sure," said Ed Slott, an IRA expert in Rockville Centre, N.Y.

Donors must be 70 1/2 or older. The charity cannot be a donor-advised fund - in which donors have a say about where the money goes - or a foundation whose purpose is to make gifts to other charities. Individuals can give away up to $100,000 a year from an IRA.

This tax break is available only this year and next.

The law applies to traditional and Roth IRAs. But tax experts agree it only makes sense to make a donation from a traditional IRA in which distributions are taxable. Roth IRA withdrawals are generally tax-free.

Many tax experts predict this perk will appeal to wealthy donors. That's because once a taxpayer's adjusted gross income reaches a certain point, personal exemptions as well as deductions for medical expenses, mortgage interest and charitable donations begin to be reduced, said Harris Abrams, a tax analyst with RIA, a provider of tax information in New York. This tax break allows wealthy donors to make a donation from an IRA without raising their income level, he said.

But this tax break might also appeal to those with modest means who regularly give to charity, Slott said.

Here's why: After age 70 1/2 , people are required to make minimum distributions out of a traditional IRA each year. But charitable donations from an IRA are considered part of required distributions under the new law.

So, say an investor must take a $3,000 distribution from an IRA this year, Slott said. She usually gives $1,000 a year to charity. By making her $1,000 donation directly from the IRA to the charity, she won't be taxed on that money. Instead, only $2,000 will be subject to tax.

Also, donating this way gives a tax break to those who don't itemize and wouldn't be able to deduct a charitable contribution on their returns, Slott said.

Killing off a tax scheme. Wealthy hunters will no longer be able to take a charitable deduction for their African safaris or big game hunts in the Alaskan wilderness.

Apparently, these hunters bagged an animal on the trip, had it stuffed and mounted and donated the trophy to a museum when they got home, Abrams said. They then deducted the cost of the trip, including plane, lodging and guide.

"I have this vision of the museum taking this thing, going to the back door and tossing it. How many moose heads does a museum need?" Abrams said.

Congress gutted this deduction. Charitable hunters now can deduct only the taxidermy costs of preparing, stuffing and mounting.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at

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