New Requirements for Charitable Contributions

Remarkably, the Pension Protection Act, signed August 17, 2006, changes the requirements for charitable contributions. This change applies for contributions made after August 17, 2006. 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 close 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 present 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 the office if you have questions.