PENSION PROTECTION ACT OF 2006

An important provision in the Pension Protection Act of 2006 potentially affects all taxpayers filing Schedule A in their 2006 U. S. Individual Federal Income Tax Return.  Signed into law on August 17, 2006; the following provision is effective the date of enactment:

Charitable Contributions

Charitable contribution deductions will be disallowed for any monetary contributions cash or check, unless the donor maintains a record of the contribution.  The record must be in the form of a bank record, cancelled check or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.  There is no “amount” limit on this provision.

Non-Cash Contributions

• For an individual, partnership or S corporation, no charitable deduction is allowed for any contribution of clothing or of household items unless the clothing or household item is in good, used condition or better.  IRS is authorized to issue regulations denying a charitable deduction for any contribution of clothing or a household item that has minimal monetary value including used socks and undergarments.
   

• The taxpayer may claim a charitable deduction even if the contributed clothing or household item is not in good used condition if the claimed deduction is for over $500 and the taxpayer includes a qualified appraisal for the property.

Effective for contributions made after August 17, 2006.

Contributions:

Here is what the law states (Internal Revenue Code Section 170 (f) (16)).

• Contributions of Clothing and Household Items:
  No deduction shall be allowed for any contribution of clothing or a household item unless such clothing or household item is in good used condition or better.
  
  There is no present definition for what constitutes good used condition or better.  It does seem clear that the purpose of this change is to keep people from taking a deduction for their donation of "junk."  Remember, though, that contributions of property are deductible at their fair market value.  If someone did donate  something that is not in good used condition or better, its fair market value would be zero or lose to zero. Also, would a charity be willing to act as a garbage dump?  Charities that take property want to sell it via their thrift shops.  Junk doesn't sell.
   

• Contributions of Items of Minimal Value:
  The IRS may, by regulation, deny a deduction for any contribution of clothing or a household item which has minimal monetary value.  This could apply to donations of used socks and used undergarments, which would be deemed to have no value.  The less said about this, the better.  Discretion is the better part of valor.
  
  The law applies to donation of household items.  The Internal Revenue code defines household items:
  
  The term "household items" includes furniture, furnishings, electronics, appliances, linens, and other similar items.  Such term does not include -- (I) food, (II) paintings, antiques, and other objects of art, (III) jewelry and gems, and (IV) collections.
   

• An Exception for Household Items of More Significant Value
  The disallowance shall not apply to any contribution of a single item of clothing or a household item for which a deduction of more than $500 is claimed if the taxpayer includes with the taxpayer's return a qualified appraisal with respect to the property.
   

• Purpose for the Changes
  The purpose of these changes is not to discourage donations, but to make the job of the IRS easier.  The Committee Report states :the fair market value-based deduction for contributions of clothing and household items preset difficult tax administration issues, as determining the correct value of an item is a fact intensive, and thus also a resource intensive matter.  The amount claimed as deductions in tax year 2003 for clothing and household items was more than $9 billion.  It is expected that the Secretary, in consultation with affected charities, will exercise assiduously the authority to disallow a deduction for some items of low value, consistent with the goals of improving tax administration and ensure that donated clothing and household items are of meaningful use to charitable organizations."
  
  There are additional changes made to charitable contributions by the Pension Protection Act and these will be covered in future articles.  But this change, since it is effective NOW, is covered NOW.
  
  Please contact our office if you have questions.
  

The PPA of 2006 also has a few items on tax-exempt status and charitable giving.

• Pension and Retirement Account Changes
  The Act includes pension charges for just about anybody who has a pension or will inherit a retirement account.  One temporary tax item, the Savers Credit, which was set to terminate at the end of 2006, has been made permanent.  This credit is available for lower income taxpayers, those with adjusted gross income (AGI - bottom of page one of form 1040) of $50,000 or less on a joint return, who made a contribution to some type of retirement account.  This non-refundable credit reduces the amount of income tax that a taxpayer has to pay.  In effect, the reduction in the tax liability is a refund of some of the money put into the retirement account.
   

• Inherited IRA's
  The major change in the Act which goes into effect in 2007 is one that allows individuals who inherit an IRA to put that money directly into anther IRA.  Current tax law allows this treatment only to the surviving spouse.  All others are required to pay tax on 100% of the retirement money in the year it was inherited or over five years.  This new rule will be a major tax saver for non-spouse beneficiaries who wish to roll the inherited IRA over into another IRA instead of taking cash pay outs.
   

• Defined Benefit Plan Changes
  Another major change should benefit those with defined benefit pension plans.  For a defined benefit plan, the amount of money a business must currently put into an investment account for its employees is based on how much each employee is expected to get every month when he or she retires.  It is the most expensive type of plan that a business can offer.
  
  It is these plans that the major businesses are under funding and turning the obligation over to the US Pension Guarantee Corporation. This portion of the law is very complicated, but it basically means that corporations with defined benefit plans must actually write larger checks to the investment account each year.  This reduces the chance that the retirement investment account will be under funded so that your promised retirement funds will be there when you are ready to retire.
   

• 401k Plan Changes
  Also in the Act, is a change in the eligibility rules for companies with 401k plans.  More employees are familiar with this type of plan.  A 401k plan, which takes its name from section 401, part k, of the Internal Revenue Code, is a defined contribution plan and requires employees to state how much they want their wages to be reduced and put into an investment account for them. Thus it defines how much is going into the plan now, not how much they will receive in the future.
  
  In the past, if a company offered a 401k plan, its employees had to tell their employers in writing, (called "electing in"), that they wanted to participate in the plan before the employer could begin taking money out of the employee's pay check.  This has changed.  In the future, employees will automatically be enrolled in the 401k plan unless they tell their employer in writing (called "electing out"), that they do not want to participate in the plan.  This may not seem like much of a change, but it does make a difference for those plans that are subject to what is called "top heavy rules."