Powerful Giving Incentive in Katrina Relief Legislation
(Sept. 26, 2005) Congress has passed a Hurricane Katrina tax relief bill that does not include the IRA Rollover provision, but does contain a new incentive that could encourage additional giving.
As reported last week, the House and Senate introduced and passed two separate Katrina tax relief packages. The Senate bill originally included the IRA rollover provision and a proposal allowing the Internal Revenue Service to share information about tax-exempt organizations with state governments. Because of strong opposition from the House, those two provisions were stripped from the bill during House-Senate negotiations.
However, the tax relief package does contain language to eliminate 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.
Powerful Incentive for Larger Gifts
This proposal creates a strong incentive to give larger gifts, even from IRAs. For example, under current law, if a taxpayer over the age of 59½ with $50,000 in income and $100,000 in an IRA wanted to contribute the money in his IRA 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. (If the donor was under the age of 59½, he would still have to pay a penalty for early withdrawal).
All gifts to charity are eligible for this incentive, not just contributions to disaster relief organizations. In addition, the provision doesn't apply solely to IRAs, but to all income.
However, it should be noted that the provision expires on December 31, 2005.
The final bill also includes tax incentives for gifts of food and books and modifies the mileage reimbursement rate for individuals when using a vehicle on behalf of a charity.
President Bush signed the bill into law on Sept. 23, 2005. A summary of the bill is provided in the Attachments section below.
AFP appreciates Congress' recognition of the charitable sector's vital importance in responding to disasters such as Hurricane Katrina, but will also be working with members of Congress to extend the incentives beyond the end of 2005.