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

Tax shelters also targeted
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.

New rules could affect universities
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.

‘Barriers to giving'?
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."

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