One brown leather bomber jacket, one child's down ski jacket and a woolen cape from Italy go into the bin. Gilda Balesh gets a "thank you" and a receipt in return.
Balesh is the exception on a recent morning at Penn Station, where volunteers for the annual New York Cares coat drive filled up 10 bags with donated coats dropped off by commuters. Few asked for a receipt, but that might soon change.
For the first time since 1969, the rules governing tax write-offs for charitable giving have been substantially tightened, many of them as a result of the Pension Protection Act passed last year by Congress.
The biggest impact from the new rules will be felt when donors sit down to itemize write-offs on their 2007 tax returns: No longer will the IRS accept “guesstimates” on the value of bags of used clothing given to Goodwill, change dropped in the Salvation Army bucket or the church collection plate or other small donations.
Instead, taxpayers will now be required to document their giving in all shapes and sizes, from used cars to used clothing. In most cases that means obtaining receipts, but in instances where that is impractical — such as the church collection plate — detailed records will be needed to justify a credit.
In other words, whereas the old tax law assumed that taxpayers would honestly report their charitable donations, the new law demands it.
The new rules also raised the bar on what can be donated, mandating that ripped clothing, broken appliances and that non-running 1985 Chevy with the rusting transmission be directed to the junk yard rather than a local charity. Only “usable items” may be deducted, and any deduction for an item valued at more than $500 must be accompanied by an official appraisal, the rules state.
Also, donors of big-ticket items such as used cars, boats and airplanes, can now only deduct the amount the charity receives from the sale of the item. Previously the deduction was based on "fair market value," which often exceeded the eventual sale price. The Congressional Joint Committee on Taxation estimates that this provision alone will generate $3 billion for the Treasury over 10 years.
Bar raised for monetary
Reporting requirements also have been changed for monetary contributions. Previously, monetary donations under $250 did not require a receipt, but now they need to be accompanied by a "statement of proof," such as a copy of a check, a bank statement or a dated communication from the charity.
Individuals with historic homes, a penchant for taxidermy or expensive art, or those who give to donor-advised funds also should be wary. The act has eliminated some write-offs and tightened the rules on others.
The rules only apply to taxpayers who itemize their deductions, making it a non-issue for the over 70 percent of Americans who file the "short form."
Charitable organizations are still assessing how the changes will affect them.
Melissa Temme, public relations director for the Salvation Army, said practices regarding cash donations for holiday season red kettles will not change. If donors want a receipt, she said, they can drop in a check with their address on it. The “thank you” notes the Salvation Army mails them can be used for tax purposes.
Organizations like the Salvation Army and New York Cares also say they are awaiting further guidance from the IRS on how to change their guidelines for donation of goods to comply with the new rules. In the meantime, they will continue to issue receipts for donated items and allow the taxpayers to fill in the value.
At the same time, they are making an effort to give donors some guidance.
How to value donated goods?
The Salvation Army has posted valuation guidelines on its Web site, and the New Fairfield Community Thrift Shop, a small nonprofit in Connecticut, is advising donors to write-off 10 percent of the original value of donated items. New York Cares recommends that givers deduct $25 per “gently used” coat.
None of those interim steps will pass muster once the IRS issues guidelines for the new rules, such as how to define “usable condition,” said Diana Aviv, president of Independent Sector, an organization that advised the Senate on the Pension Protection Act.
“The one thing we insisted on is that the charity does not place a value on donated items,” she said. “It creates an inherent conflict of interest."
The goal of the tax code changes, which coincide with increased IRS scrutiny of the tax-exempt sector, is to close the gap between write-offs for donations and the monies that charities actually receive.
The discrepancy is believed to be a large one.
A congressional study published this summer found that 6 million Americans claimed $37 billion in tax deductions for non-cash charitable donations in 2003. Of that amount, $9 billion was for used clothing and other donated items. Four million households claimed an average of $1,440 in deductions for clothing, and 2.4 million taxpayers claimed an average of $1,356 for donated household goods, it found.
No corresponding figure exists for the amount of money realized by the charities through the sale of the donated goods, but the study nonetheless raised eyebrows on Capitol Hill. It also was instrumental in getting Sens. Chuck Grassley, R-Iowa, and Max Baucus, D-Mont., ranking members of the Senate Finance Committee, to launch a bipartisan effort to pass reforms intended to put the spirit of giving back into the practice of it.
The new rules also target provisions meant to promote philanthropy that have been turned into tax shelters for the wealthy.
One such dodge is the use of donor-advised funds, which allow individuals to give large monetary gifts to a public foundation with the stipulation that they will advise the foundation on how to make grants. Everson, the IRS commissioner, said at a Senate hearing that some donors had in turn billed the foundations for "fact-finding" trips to inform their decisions. For example, he said, one donor took his family on a trip to snorkel in the Cayman Islands in order to decide whether to donate money to coral reef preservation efforts there.
Starting Feb. 13, the new rules will prohibit such donations from being used to fund any study, travel or research costs. Additionally, the donated funds will be the sole property of the foundations, which will have the final say in how they are distributed.
The law also aims to crack down on the practice of fractional gifting of works of art, a provision that previously allowed art collectors to make donations to museums without leaving a bare spot on the living room wall. As previously interpreted, the rule allowed the collectors to promise to eventually hand over the art -- in some cases not until the time of the donor’s death. In the meantime, they enjoyed an annual tax write-off from it that appreciated at the same rate as the “donated” art.
Museums are patient, but the new Pension Protection Act isn't. Donors are now required to hand over any donated art within 10 years, and the value of the artwork is determined at the time the gift is made.
The change triggered an outcry in the art world and concerted lobbying by museums, raising the possibility that it may be revoked or revised under the new Congress.
Rules also have been tightened for supporting organizations, which are public charities set-up to support another public charity. Universities often use supporting organizations to raise money for their foundations, and alumnae use them to fund booster clubs for college athletics.
Soon, however, such organizations will no longer enjoy full deductions, and they will face new restrictions on what happens to their money once it's handed over. The Treasury Department is still writing the guidelines that will govern these types of charities.
There have also been changes to rules governing gifts of taxidermy and property for conservation. All changes in charitable giving rules can be found on the IRS Web site.
The new rules also aim to encourage new forms of giving. An IRA roll-over provision, which will sunset after 2007, allows individuals over 70 1/2 to transfer up to $100,000 of their required minimum distribution to a charity.
"If you are in the position of having to take a required minimum distribution but you don't need the money, you are increasing your taxable income,” said Greg McBride, a senior financial analyst at BankRate.com. “If a retiree takes advantage of this provision and sends the money directly to a charity, they can satisfy the requirement without increasing their tax burden."
One thing the new rules haven't changed, McBride says, is the lesson that "the more you earn the more you can deduct, and the impact is less on someone who is in the 35 percent tax bracket versus the 25 percent bracket."
In other words, a $100 donation only costs an individual in the highest tax bracket $65 because it lowers the person's taxable income, said McBride, noting that viewing gifts in “after-tax dollars” encourages wealthy donors to contribute more.
The nonprofit sector had unprecedented access in advising the Senate Finance Committee on the new rules, according to Aviv, the president of Independent Sector, an umbrella group that represents charitable organizations.
But despite such input, reaction to the changes has been mixed.
"The biggest fear raised by everyone was that it would create barriers to giving," said Aviv.
Large charities have complained that they have been unfairly singled out under the new rules. Aviv, however, counters that many of those changes were required to maintain public trust in a nonprofit sector that has been tarnished by a number of high-profile tax-evasion schemes and other scandals.
The impact on small-time giving also concerns some charities and donors.
Gilda Balesh, who got a receipt for her donated coats because she knew about the changes, feels that small-time donors will be hurt by the new rules.
"It's unfair to us small donors," she said. "I give in small amounts. I give money to the Salvation Army buckets, and I do leave clothes at the drop bins. I give what I can, and now I have to document all of it for a refund?"
But a Senate Finance Committee staff member, speaking on condition of anonymity, said the new rule is actually a clarification, because taxpayers have always been required to justify their deductions in case of an audit.
“Requiring (a receipt) for all cash donations ends confusion for taxpayers,” the staff member said. “Previously taxpayers were under the wrong impression that they didn’t have to have any proof of small cash donations and they found this out the hard way in audit.”
And some small charities believe the new record-keeping requirements will actually help them.
Linda Wise, of the New Fairfield Community Thrift Shop in Connecticut, said she hopes the new rules lead to an improvement in the quality of donations.
“Even a family that's completely down on their luck isn't going to wear tattered clothing,” she said. “People drop off the bags at the door and don't ask for a receipt because they're embarrassed, and we incur the cost of getting rid of their junk."