Get Receipts for Every Donation: New Tax Laws Require Them

      The new Pension Protection Act of 2006 has received mixed reviews as either a great retirement tool or a burden for individuals. Several charities are also celebrating the ease at which the bill will make streamlining of donations such as $100,000 rollover from IRAs. [1] However, several provisions in the new bill will result in unprecedented scrutiny from the Internal Revenue Service concerning charitable donations. For every cash donation, regardless of the amount, taxpayers will have to get a receipt and clothes, household goods and other items donated to charities will only be accepted if they are in “good” or “workable” condition. [2]

      Every summer, Jane Horn cleans out her attic and garage. The items she does not want anymore are placed in several garbage bags and donated to her local Salvation Army. For the past several years, Jane dropped the bags off at the Salvation Army and filled out a blank receipt in their log.  Jane then used that receipt to claim a deduction on her tax return. This August, Jane had an unexpected problem when she came to the Salvation Army for her annual donation. On this occasion, a worker at the Salvation Army informed Jane that a new policy prevented her from simply leaving her piles of garbage bags without prior inspection.  He had Jane go through the bags and told her that if the items were not in "good" or "workable" condition he would not be able to take the items. After the worker's inspection, several bags and furniture items, including pieces she bought from the Salvation Army months earlier, were rejected.  Among the items rejected were a 25 year old dining table which had marks and a coffee table that was missing a leg. Afterwards, Jane went to the local dump to get rid of the leftover items. This year, Jane's donation receipt had fewer items so she will not be able to claim the same deduction as last year. Jane's experience will become common for charitable donors since President Bush signed the new Pension Protection Act of 2006 in August.

      The Pension Protection Act is the first overhaul of the retirement savings system in 30 years. [3] Buried in the new bill, however, are tax provisions aimed at charitable donations. [4] These new provisions affect everyone from wealthy art patrons to people like Jane Horn who annually drop off old items in exchange for a deduction on their tax return.  These changes to the tax code could make things more complicated for taxpayers. [5] The new tax provisions in the Pension Protection Act will require receipts for all charitable donations ranging from items such as clothing to money given to church collection plates. [6] Starting January 1, 2007, cash donations from individuals, regardless of the amount, will require some record documenting the contribution, such as: a bank record, canceled check or other written communication. [7] Changes related to non-cash donations such as clothing and household goods took effect as of August 18. [8] These non-cash items must be in "good" or "workable" condition or better to receive a tax deduction. [9] The law does not define what qualifies as “good” or "workable." [10] The IRS has stated that they will define these terms later. [11]  However, there is an exception for items not in "good" or "workable" condition. Items worth $500 dollars or more can be still donated provided that they include a qualified appraisal, even if they are not in good condition. [12]  The Internal Revenue Service also may deny deductions for items of minimal monetary value such as used socks and undergarments. [13]  Prior to mid-August, when the law was signed, regulations were more flexible. [14]  For example, cash donations of less than $250 just needed some sort of reliable record of the event. [15]  In addition, retirees can give up to $100,000 directly from an IRA without paying income tax on it as opposed to moving the funds into their personal accounts and incurring income tax prior to donation. [16] As a result, the new law is seen as a great thing for charities because big donations likely will increase. [17]

      The tax provisions in the new Pension Protection Act will allow the IRS to scrutinize charitable donations and crack down on abuses. [18] Some common abuses that the IRS will now be able to track are exaggerations of the amount of cash donated under $250 to charities and paintings questionably valued in the multi-millions donated to museums. [19] Many tax accountants and lawyers are still trying to interpret and analyze the month old bill in preparation for the upcoming tax season. For example, some accountants are now advising wealthy art patrons to stop taking fractional donations on pieces of art. [20]  Fractional gifts — under which an artwork is “donated” but can remain largely in the owner’s possession — have in the past been abused by wealthy donors, some of whom received upfront tax deductions for works that will not appear in museum collections for decades, if ever. [21] Museums have responded to the new tax provision by lobbying influential senators for a change in that provision because several works of art including assemblages by Joseph Cornell in the Bergman Collection at the Art Institute of Chicago have been acquired through fractional gifts. [22]
      

      What about the effect of the new tax provisions on middle and lower income taxpayers? Most taxpayers do not donate multi-million works of arts to museums for sizable up-front donations nor are they in the position to donate up to $100,000 from their IRAs to charities. Most taxpayers take advantage of charitable deductions by donating clothing and household items or donating cash to flood-relief activities. Whereas the old rules did not require receipts for cash donations under $250, the new rules could potentially have people asking for a receipt for the $5 dollars they put in a Salvation Army kettle during Christmas to asking for a receipt after church services for the money put in the collection plate. Many churches and organizations give detailed statements to taxpayers for sizable donations given throughout the year. But will these organizations now give similar detail statements to taxpayers who contribute smaller amounts? Presently, it seems like the burden will shift to taxpayers to keep cancelled checks and receipts for every dime given to charity. Many charities are hoping that many people will continue to donate despite the increased burden to keep detailed records. While there are some taxpayers who donate without the goal of receiving a receipt for deduction, there are many people who relied on their charitable donations for tax deductions.  Another potential problem is related to the IRS’s delay in defining what it considers “good” or "workable" condition for items donated to organizations such as the Goodwill and Salvation Army. Until the IRS defines objective guidelines, the determination will fall on local charities to subjectively define what items are in "good" or "workable" condition.  This could become an administrative headache for people who are honestly giving away items in their homes that they no longer want.  It is too early to tell what the effects of these provisions will have on taxpayers and charities such as the Salvation Army which rely heavily on cash donations. After the tax deadline on April 15th, the public and the IRS will likely begin to find out the results of the new charitable donations restrictions.

1. BARBARA PASH, Sweeping Changes for Charitable Giving, BALTIMORE JEWISH TIMES, Sept. 21, 2006http://www.jewishtimes.com/News/5933.stm

2. MY-LY NGUYEN, Feeling Charitable? Hang on to Those Receipts…A New Tax Law Requires Them, PRESS & SUN-BULLETIN GREAT BINGHAMTON, NY, SEPT. 17,2006, available at
http://www.pressconnects.com/apps/pbcs.dll/article?AID=/20060917/BUSINESS/609170305/1002/BUSINESS

3. PRESS RELEASE, COMMITTEE ON WAYS AND MEANS, The Pension Protection Act of 2006 Detailed Summary of Charitable Provisions, available at http://waysandmeans.house.gov/media/pdf/taxdocs/072806charitable.pdf#search=%22pension%20protection%20act%20charitable%20donations%22

4. . MY-LY NGUYEN, Feeling Charitable? Hang on to Those Receipts…A New Tax Law Requires Them, PRESS & SUN-BULLETIN GREAT BINGHAMTON, NY, SEPT. 17,2006, available at
http://www.pressconnects.com/apps/pbcs.dll/article?AID=/20060917/BUSINESS/609170305/1002/BUSINESS

5. Id.

6. TERESA DIXON MURRAY, Sorting Out Pluses, Minuses of the Pension Reform Law, Sept. 15, 2006, NEWHOUSE NEWS SERVICE, http://www.newhousenews.com/archive/murray091506.html

7. Id.
8. BILL SPENCER, New Tax Laws Aimed At Charitable Giving, THE DETROIT NEWS, Sept. 11, 2006, available at http://www.detnews.com/apps/pbcs.dll/article?AID=/20060911/LIFESTYLE/609110384/1005

9. Id.                                                                                                                                        10. Id.
11. MY-LY NGUYEN, Feeling Charitable? Hang on to Those Receipts…A New Tax Law Requires Them, PRESS & SUN-BULLETIN GREAT BINGHAMTON, NY, SEPT. 17,2006, available at
http://www.pressconnects.com/apps/pbcs.dll/article?AID=/20060917/BUSINESS/609170305/1002/BUSINESS

12. Id.
13. Id.
14. Id.
15. Id.
16. TERESA DIXON MURRAY, Sorting Out Pluses, Minuses of the Pension Reform Law, NEWHOUSE NEWS SERVICE, SEPT. 15, 2006, http://www.newhousenews.com/archive/murray091506.html

17. Id.
18. BARBARA PASH, Sweeping Changes for Charitable Giving, BALTIMORE JEWISH TIMES, SEPT. 21, 2006, http://www.jewishtimes.com/News/5933.stm

19. Id.

20. JEREMY KAHN, Museums Fear Tax Law Changes On Some Donations, NEW YORK TIMES, SEPT. 13,2006, available at http://www.nytimes.com/2006/09/13/arts/design/13gift.html?_r=2&oref=slogin&oref=slogin

21. Id.
22. Id.

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