Charitable Giving Tax Limits Temporarily Lifted

Tax benefits in relief bill are short-lived but significant

The president has signed into law new charitable giving provisions as part of a Hurricane Katrina tax package designed to encourage giving both to relief organizations and charities overall.

The most important provision for many charities is the elimination of the 50 percent adjusted gross income limitation on charitable deductions by individuals.

Under current law, individuals may deduct charitable donations in a year up to 50 percent of their adjusted annual gross income. Deductions for charitable donations are further limited by the phase-out of itemized deductions. Under the proposal, cash donations to charities are exempt from the 50-percent income limitation and the phase-out of itemized deductions if the donations are made before January 2006.

This provision creates a strong incentive to give larger gifts, especially from retirement funds such as IRAs, 401(k) and other retirement plans. For example, under current law, if a taxpayer with $50,000 in income and $100,000 in a retirement fund wanted to contribute the money in his retirement fund to charity, the most he could deduct is $75,000 (that is, 50 percent of $150,000, his adjusted gross income for the year).

Under the provision in the tax relief package, that donor could take a deduction for the full amount of the gift, or $100,000. In fact, to take an extreme example, if he wanted to contribute all of his income to charity, he would take a deduction for the full amount, or $150,000. However, penalties for early withdrawal are still applicable.

All gifts to charity are eligible for this incentive, not just contributions to disaster relief organizations.

“This is a potentially very powerful incentive for giving, but it has a very short shelf-life,” said AFP President and CEO Paulette V. Maehara, CFRE, CAE, referring to the provision’s expiration date of Jan. 1, 2006. “Given that most donors will be unaware of this provision, charities should be reviewing their donor lists and contacting those individuals who could take advantage of it.”

Copyright ©2005, Association of Fundraising Professionals (AFP), all rights reserved. Reprinted with permission.

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