Rules for Deducting Charitable Contributions

When making charitable contributions to a tax-exempt organization, there are certain rules you should know.

Before making a charitable contribution be sure that the organization is a qualified organization under the definition given by the Internal Revenue Service.  Some examples of qualified organizations are those with the following purpose: religious, charitable, educational, scientific, literary, prevent cruelty to children or animals, war veterans, domestic fraternal societies, certain nonprofit cemetery companies, the United States of America, any state or political subdivision that performs substantial government functions (in this case the contribution must be made exclusively for public purpose).

In general, you can deduct your contributions of money or property to any qualified organization as long as the contribution is not intended for a specific person.  An example the IRS gives is that you can deduct donations to hurricane relief groups, but not to a specific family affected by the hurricane. The donation must be general to the organization, not to a specific individual. Similarly, you can deduct contributions to a hospital, but not to pay for a specific patient’s care.

Other contributions the IRS will not allow you to deduct include: the value of your time or service, appraisal fees, personal, living or family expenses.  In general, you cannot deduct contributions if you stand to benefit as a result.

Clothing and Household items are contributions that are subject to special rules.  Household items include: furniture, furnishings, electronics, appliances, linens and other similar items.  Household items do not include: food, paintings (antiques and other objects of art), jewelry, and collections. Clothes and household items donated after August 17, 2006 must be in good used condition or better in order to be deductible.

Beginning in 2007, in order to deduct a cash donation, regardless of amount, you will need to keep a bank record of the transaction (a canceled check, a bank copy of a canceled check, a bank statement) which contains the name of the qualified organization, the date, and the amount donated.  A written communication from the organization is also acceptable and must include the same information (name of the organization, date, and amount).

As part of the reporting requirements, in order to be able to deduct your contributions, you must inform the qualified organization at the time of the donation that you intend to treat it as a contribution.  You are required to keep a record of the cash and non-cash donations you make during the year.  Also, you are permitted to take deductions only in the year you actually make the contribution.  Report your charitable contributions on lines 15-18 of Schedule A on Form 1040.  For non-cash contributions, you may be required to fill out Form 8283.

The IRS limits the amount you are able to deduct at 50% of your adjusted gross income.  Your adjusted gross income can be found on line 38 on Form 1040.  Depending on the type of organization you give to, as well as the property, the allowable deduction may only be 20-30% of your adjusted gross income.

If you have any further questions on what you can or cannot deduct, please call your Anquillare, Ruocco, Traester and Company representative.

 Amendment to Medicaid Long-Term Care Benefits

As of April 1, 2007, the Department of Social Services will be operating under a new amendment to the Uniform Policy Manual regarding the eligibility requirements for individuals applying for or receiving long-term care benefits under the Medicaid program.  The amendment is to comply with, and give effect to, the Deficit Reduction Act of 2005.

As part of the amendment, the “look-back” period for asset transfers that may affect patient eligibility for the Medicaid program’s long-term care benefits has been extended from three years to five years.  This affects asset transfers made on or after February 8, 2006.

The “penalty period” is the time during which Medicaid will not pay for LTC services. The penalty period generally begins as of the date that the applicant is eligible for Medicaid. The penalty period for recipients of LTC Medicaid benefits begins as of the month of the transfer, provided this month is not part of any other period of ineligibility. This change is also effective for transfers made on or after February 8, 2006.

Under the Medicaid program, an individual with equity exceeding $750,000 in their home property is ineligible for payments for the long-term care services, effective for applications on or after January 1, 2006.  In an effort to reduce their home equity, individuals may take out a home equity loan or a reverse annuity mortgage; however, a transfer of asset penalty may be imposed if the individual transfers the proceeds from the loan or mortgage. 

Individuals purchasing an annuity on or after February 8, 2006 are advised to make the State the remainder beneficiary, otherwise the purchase will be considered a transfer of assets for less than fair market value.

Also incorporated in the amendment are provisions regarding undue hardship, the treatment of annuities, mortgage notes, life estates and continuing care retirement communities.

 Pension Protection Act of 2006

There are many aspects of this act, but 200 of the 900 pages cover issues related to tax exempt organizations. The following will highlight some of the major points of interest.

The Pension Protection Act allows individuals 70 ½ years old to make tax free transfers of up to $100,000 to charitable organizations directly from their Roth or traditional IRA without penalty (this expires at the end of 2007). While not many people will want to or even be able to take advantage of this new rule, qualifying charitable organizations may want to inform their wealthiest donors of this opportunity.

Supporting organizations may want to consider changing their public charity classification. The benefit of changing their classification would be that the organization would then be eligible for a “direct from IRA” contribution.

As of August 17, 2006, there are new rules which apply to the donation of clothing and household items. A donation with a value of $500 or more may have special rules applied to it if a qualified appraisal is done. For donations under $250, the donor must receive a receipt from the charity which includes the organization’s name, date, location of the drop off and a description of what was donated. The charity should not place a fair market value on this receipt; however, for the purpose of internal record keeping  a fair market value should be documented when possible.

The new law also focuses on what it calls “qualified appraisals” done by “qualified appraisers.” This is in relation to substantiation of donations. Appraisers must have a combination of education and experience relevant to the property being appraised for returns filed after February 16, 2007. The law also has instituted new penalties for those appraisals it deems were not done correctly.

 Department of Social Services Increases Burial Allowance

The Department of Social Services has amended the Uniform Policy Manual to increase the burial allowance and exclusion for the Temporary Family Assistance, State Supplemental Assistance and State Administered General Assistance programs.  As of March 7, 2007, the burial allowance and exclusion will be increased from $1,200 to $1,800.

 Reliance on Third Party to Pay Employment Taxes

Many employers use third party payroll service providers to outsource some or all of their payroll and related tax responsibilities. This can be very helpful in assuring filing deadlines are met, payroll is properly administered and that reporting, collecting and payment of employment taxes with the correct state and federal authorities has been completed. Even when using a third party payroll provider, it is essential for employers to realize that they (the employers) are ultimately responsible to make sure that deposits and payment of federal taxes are being made properly. The employer is liable for all taxes, penalties and interest due even if the payroll provider fails to do so.  An easy way for employers to confirm that their payments are made on time is to enroll in EFTPS (Electronic Federal Tax Payment System) which allows the employer to track their payment history online. This service is offered by the U.S. Department of the Treasury and is free of charge. For more information, go to www.eftps.gov