President Signs Katrina Giving Measures
(Oct. 17, 2005) The president has signed into law new charitable giving provisions as part of a Hurricane Katrina tax package designed to encourage giving both to relief organizations and charities overall.
The most important provision for many charities is the elimination of the 50 percent adjusted gross income limitation on charitable deductions by individuals.
Under current law, individuals may deduct charitable donations in a year up to 50 percent of their adjusted annual gross income. Deductions for charitable donations are further limited by the phase-out of itemized deductions. Under the proposal, cash donations to charities are exempt from the 50-percent income limitation and the phase-out of itemized deductions if the donations are made before January 2006.
This provision creates a strong incentive to give larger gifts, especially from retirement funds such as IRAs, 401(k) and other retirement plans. For example, under current law, if a taxpayer with $50,000 in income and $100,000 in a retirement fund wanted to contribute the money in his retirement fund to charity, the most he could deduct is $75,000 (that is, 50 percent of $150,000, his adjusted gross income for the year).
Under the provision in the tax relief package, that donor could take a deduction for the full amount of the gift, or $100,000. In fact, to take an extreme example, if he wanted to contribute all of his income to charity, he would take a deduction for the full amount, or $150,000. However, penalties for early withdrawal are still applicable.
All gifts to charity are eligible for this incentive, not just contributions to disaster relief organizations.
'This is a potentially very powerful incentive for giving, but it has a very short shelf-life,' said AFP President and CEO Paulette V. Maehara, CFRE, CAE, referring to the provision's expiration date of Jan. 1, 2006. 'Given that most donors will be unaware of this provision, charities should be reviewing their donor lists and contacting those individuals who could take advantage of it.'
Incentives for Corporate Giving, Gifts of Food and Books
Other incentives in the Hurricane Katrina tax package that affect charitable giving and volunteerism include:
- Encourage cash donations by corporations. Under current law, corporations may deduct charitable donations up to 10 percent of their taxable income. The proposal waives the 10-percent income limitation for cash donations related to Hurricane Katrina if the donations are made before January 2006.
- Modify tax treatment when using a personal vehicle for charitable work. Under current law, individuals may claim a tax deduction for the costs associated with using a personal vehicle for charitable work. The deduction is calculated by using a mileage reimbursement rate of 14 cents-per-mile. The reimbursement rate for business use is set periodically through IRS guidance and currently stands at 48.5 cents-per-mile. The proposal sets the mileage reimbursement rate for charitable contributions at 70 percent of the standard business mileage rate. If the individual is a volunteer and is reimbursed for the use of the personal vehicle, the proposal ensures that the individual does not have to pay income tax on the reimbursement. Both provisions are effective through Dec. 31, 2006.
- Encourage charitable donations of food inventory. Under current law, C-corporations may deduct the cost of food inventory donations. The value of the deduction is equal to the lesser of two times the basis or basis plus one-half of the added value. The proposal extends the current-law deduction for food donations to S-corporations, partnerships and sole proprietors through the end of the 2005 calendar year.
- Encourage donations of educational books to public schools. The proposal allows a charitable deduction through the end of the 2005 calendar year for donations of educational books to public schools. The value of the deduction is equal to the lesser of two times the basis or basis plus one-half of the added value.
For more information about the newly-signed law, contact Jason Lee, director, government relations, at email@example.com.
Related AFP ResourcesCharitable Giving Coalition Sends Letter on Trump Tax Plan
AFP Rebuts Opinion Piece on Charitable Giving Incentive
New Charity Package Introduced in Senate
IRS Withdraws Substantiation Proposal Thanks to Thousands of Nonprofit Comments
Senate Working Groups Highlight Charitable Giving Incentives in Tax Reform “Exploration”