Tax Incentives for Charitable Giving

by Jesse Palmer

?As year-end approaches, there is still time to determine what tax-planning strategies to implement before 2006. In addition to the traditional laundry list of year-end tax-saving moves, the recently passed Katrina Emergency Tax Relief Act (KETRA) creates new opportunities in charitable giving for both individual and business taxpayers.

Generally, individuals are allowed an itemized deduction for contributions made to qualified charitable organizations. The deduction is limited to 50% of the individual’s adjusted gross income (AGI) for contributions of cash and property and 30% of AGI for contributions of appreciated capital gain property (i.e., appreciated stock). Any excess contributions may be carried forward up to five years. Also, an individual’s total itemized deductions are reduced by 3% of the amount of AGI in excess of $145,950 for joint tax returns.

Under KETRA, cash contributions made to charities between August 28, 2005, and December 31, 2005, are not subject to the AGI limitation or the itemized-deduction phaseout. There also is no requirement the donation be made specifically for Hurricane Katrina relief. For example, a cash contribution made to the American Cancer Society on November 1, 2005, qualifies for the KETRA relief provisions even if the donation was not used for Hurricane Katrina relief. Only cash contributions qualify. Contributions of appreciated stock are still subject to the 30% of AGI limitation and itemized deduction phaseout.

Similar relief provisions also apply to corporations. Generally, corporations are allowed to deduct charitable contributions only up to 10% of taxable income, with any excess carried forward up to five years. This limitation has been eliminated for qualified contributions made during the period stated above. But to qualify, the contributions must be made specifically for Hurricane Katrina relief efforts and be properly substantiated.

KETRA also provides an enhanced deduction for charitable-related mileage. Normally, an individual is allowed to deduct, as a charitable contribution, mileage incurred related to providing charitable services. The deduction is 14 cents per mile. Under KETRA, the mileage rate is increased to 70% of the business mileage rate in effect during the period of August 25, 2005, to December 31, 2005, for vehicle use in providing donated services to a charity for relief related to Hurricane Katrina. The rate is 34 cents per mile from September through December 2005.

Thousands of Gulf Coast residents displaced by Katrina’s devastation were offered refuge in homes throughout the country. KETRA provides a special tax deduction for households providing at least 60 days of rent-free housing to dislocated Katrina survivors. The deduction is $500 for each dislocated person housed in the taxpayer’s principal residence, and can be claimed in 2005 or 2006. The total deduction is capped at $2,000. However, the deduction cannot be claimed if the dislocated person is the taxpayer’s spouse or dependent or if any rent is received.

The IRS also has relaxed rules related to leave-based donation programs. Some employers recently have adopted these programs allowing employees to forgo vacation, sick or personal leave in exchange for cash payments an employer makes to charitable organizations. In a recent notice, the IRS asserts it will not treat cash payments employers make to charitable organizations in exchange for an employee’s paid time off as gross income to the employee if payments are made for relief of Hurricane Katrina victims and are paid before January 1, 2007. Since employees are not required to include the donated time as income, they cannot deduct the value of the paid time-off donated as a charitable contribution.

Other provisions related to Katrina relief may apply to your situation. Contact your tax advisor for specific details on how these changes may affect you and your business.

Jesse Palmer ?is a tax manager in the Kansas City office of BKD, LLP. He can be reached at jpalmer@bkd.com.