Katrina-Related Tax Breaks, and One That Isn't

By Albert B. Crenshaw
Sunday, November 6, 2005

If you're considering making a big cash contribution to a charity and deducting it this year, Congress may have given you an unusual opportunity.

At a time when lawmakers and the Internal Revenue Service have tightened up on such things as donations of cars and real estate facade easements, they have also created several special breaks for charitable gifts after Hurricane Katrina. Most of them have to be related to Katrina, but one key one does not, and it could be a major benefit for taxpayers willing and able to give away big bucks.

To put this into context, you have to understand the various limitations on charitable giving that normally determine whether you can take a writeoff and, if you can, just how big it normally can be.

First, you have to itemize your deductions to get a break. This provision, which is frequently criticized, means that many lower-income donors get no tax benefit for their gifts.

Second, for itemizers, there are broad rules limiting the amount by which you can reduce your taxable income by making gifts.

In a normal year -- and this one isn't -- your charitable deductions cannot exceed 50 percent of your adjusted gross income. In fact, depending on what you give and to whom you give it, the limit can be lower. The 50 percent limit applies for gifts to churches, schools, hospitals and public charities. Because of the limit, these are known colloquially as "50 percent organizations," and the IRS lists them in Publication 78, which is available on its Web site, http://www.irs.gov/ .

But there is a further limit: If you donate appreciated property, such as stocks that have gone up in value since you bought them, your deduction is limited to 30 percent of your AGI.

That isn't all, of course. If your gift is to a charity other than a 50 percent organization -- and these include veterans groups, fraternal societies, certain private foundations and others -- the limit on your deduction is 30 percent of your AGI. And the deduction of donations of appreciated property to a 30 percent organization is limited to 20 percent of your AGI.

A taxpayer who hits one of these limits can carry unused deductions forward for up to five years, deducting them later, but is subject to the same percentage limits.

However, in the wake of Katrina, Congress temporarily changed the rules. This year, you may deduct donations made to most 50 percent organizations up to 100 percent of your AGI.

The donation has to be cash, and it has to have been made between Aug. 28 and Dec. 31 of this year. Also, noted Martin Nissenbaum, national director of personal income-tax planning at accountants Ernst & Young, the recipient cannot be a supporting organization, a special kind of charity whose purpose is to aid another, public charity. Nor can it be a donor-advised fund, a charitable mutual fund to which a person may contribute and then later recommend causes to which his or her money should go.

"Congress wised up to that. They weren't going to let people slam money into those" types of organizations to hand out later, Nissenbaum said.


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