CHARITABLE CONTRIBUTIONS

The IRS has made some significant changes in Charitable Contribution rules that could affect most of us and I want to briefly share some of these new regulations with you:

Contributions of Clothing and Household Items

Deductions for the gifts of clothing, furniture or other household items to the Church will not be allowed unless the item is in good or better condition. Detailed lists of your contributions along with pictures or other means of proof that items were in good condition may be required if you are audited. Also, please provide your detailed list to the Church when you make your contribution of clothing or household items if you wish to obtain a letter of verification from us. We can no longer provide a verification letter with a limited description such as ‘Clothing’ for your gift.

Dent K. Burk Associates PC website has the Salvation Army Donation Guide for estimating values for these types of contributions. If you believe the value of your gift(s) is more than these guidelines, you may want to consider having the item(s) appraised so that your claimed contribution doesn’t precipitate an IRS audit.

Cash Gifts Under $500

In the past, you may have put $20 in the Communion offering every month and deducted the $240 on your taxes. This is no longer permissible. You will need a receipt or cancelled check. To get a receipt from the Church, you will either need to put the cash in an envelope with your name on it or put a check in the Communion Offering basket.

Non-cash Gifts and Appraisals

While we don’t have a lot of non-cash gifts, the IRS has really tightened reporting and substantiation requirements on these types of gifts and added significant penalties for both the taxpayer and the appraiser if mistakes or estimates of value are significantly overstated. If you would like to make a non-cash gift, let’s discuss ahead of time. Please call me at 224-1511.

With planning and foresight, you can still take full advantage of your contributions to the Church and other charitable organizations. However, it is going to be a little more work than in the past. Please let me know if we can help.
 
                                                                                                                    Mike McIntire
                                                                                                                    Business Admnistrator

The Pension Protection Act of 2006 and How It Might Benefit You

The Pension Protection Act of 2006 which was signed into law by President Bush on August 17, 2006, provides an exclusion form gross income for otherwise taxable IRA distributions from a traditional or a Roth IRA when the distribution is made to a qualified charity. Under this new law, persons who are 70½ or older can, for 2006 and 2007, transfer up to $100,000 dollars per year from an IRA directly to the church or other qualified charity.

In order to receive this exclusion, the distribution must be made by the trustee. In other words, a qualified charitable distribution is any distribution from an IRA directly by the IRA trustee to a qualifying organization. First Broad United Methodist Church (FBSUMC) is such an organization that would qualify.

How does this work and how can it benefit you? For 2006 and 2007, distributions of up to $100,000 made directly from your bank or other financial institute trustee can be excluded from gross income. Thus you can avoid adjusted gross income on your tax return. Let me give you some examples of how this might work.

Example 1. Sharon, who is age 71 (although she looks 39), has a traditional IRA with a balance of $100,000, consisting solely of deductible contributions and earnings. The entire IRA balance is distributed to the FBSUMC Building Fund. Under the old law, the entire distribution of $100,000 would be included in Sharon’s income. Under this new law, the entire distribution of $100,000 is a qualified charitable distribution. As a result, this distribution is not included in Sharon’s income and the distribution is not taken into account in determining the amount of Sharon’s charitable deduction for the year when her income tax is determined.

Example 2. Wayne is aged 71, and has an IRA consisting solely of deductible contribution and earnings. His family contributes $5,000 each year to FBSUMC. But, because he and his wife take the standard deduction, he gets no tax benefit. Wayne’s required minimum distribution is $5,000. Assuming they are in the 28% tax bracket, if Wayne takes the $5,000 out of his IRA and writes a check to FBSUMC, he will pay $1,400 in tax ($5,000 times 28%) but will have no charitable deduction. By requesting the IRA trustee to send a check directly from the IRA to FBSUMC, they can make their regular contribution while taking their required minimum distribution and save $1,400 in income tax.

Example 3. Vern, who is 80 (although he looks 90), has a traditional IRA with a balance of $100,000, consisting of $20,000 of nondeductible contributions and $80,000 of deductible contributions and earnings. In a distribution to FBSUMC Endowment Fund, $80,000 is distributed from this IRA. Under the prior law, a portion of the distribution from the income would be treated as a nontaxable return of nondeductible contributions. The nontaxable portion of the distribution would be $16,000, determined by multiplying the amount of the distribution ($80,000) by the ratio of the nondeductible contributions to the account balance ($20,000/$100,000). Accordingly, under prior law, $64,000 of the distribution ($80,000 minus $16,000) would be includible in Vern’s income.

Under the new law, this distribution is treated as consisting of income first, up to the total amount that would be included in gross income. As a result, no amount is included in Vern’s income as a result of this distribution and the distribution is not taken into account in determining the tax treatment of future distributions from the IRA. Thus, the $20,000 remaining in the IRA is treated as Vern’s nondeductible contributions and would not be subject to tax upon distribution.

In conclusion, if you do not itemize deductions, you can get full benefit for your contribution without increasing your taxable income plus you are still able to take the full standard deduction on your income tax. If you do itemize deductions, this IRA distribution made to FBSUMC is not included in your taxable income and thus the many adjusted gross income and related deductible phase outs on itemized deductions are minimized. This would also prevent an increase in the amount of social security benefits that would be taxable.

We hope this overview provides you with a good idea of how this new law may benefit