It's better to gift and receipt under new tax rules

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 donations too
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.

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