Charitable Giving Incentives in the Katrina Tax Relief Act

The recently signed Katrina Emergency Tax Relief Act of 2005 contains a number of important provisions that are designed to encourage charitable contributions for Hurricane Katrina relief efforts. Some of the provisions of the Act have broad application and offer a short-term planning window for anyone who intends to make a significant charitable contribution by the end of 2005. Details of the Act provisions, and how they can be used to your advantage, follow.

Temporary Suspension of Limitations on Charitable Contributions

Charitable contributions by individuals are subject to the so-called "percentage limitations," which limit the amount of your charitable deduction to a percentage of your overall income. Contributions of cash are usually limited to 50% of your adjusted gross income, while contributions of property are limited to 30%. Individuals making a large gift often bump up against these limitations, especially when subject to the 30% limitation for gifts of property. To the extent that a charitable gift exceeds either of these limitations, you may carry forward the excess deduction for up to five taxable years. The excess can be deducted in each of those years, subject to a recalculated 50% or 30% limitation. Any contribution that cannot be deducted during the five-year carry forward period is permanently lost for deduction purposes.

In addition to the percentage limitations, a portion of your itemized deductions is disallowed when your adjusted gross income exceeds $145,950 (in 2005). This disallowance includes any charitable contribution deductions.

The Act suspends the percentage limitations and the deduction cut-back for cash contributions made after August 27, 2005 and before January 1, 2006. The contribution does not have to be made for Hurricane Katrina relief efforts, but must be made to a "public" charity (i.e., not a private foundation) that is neither a "supporting organization" nor a donor-directed fund. The taxpayer must also elect this special treatment. If the election is made, a qualified contribution made within the specified time period will not be subject to the 50% or 30% limitation and may be deducted up to the amount of your total income.  

Although this provision presents an opportunity for an individual planning to make a large charitable gift, a number of factors will have to be considered before making the election. In many cases, it may be better to remain subject to the 50% limitation and carry over the excess deduction to the next taxable year. The use of the 50% limitation allows you to match your charitable contribution deduction to your income subject to the highest income tax rates, possibly over several years. If, on the other hand, you make the election permitted by the Act, a significant portion of the charitable contribution deduction would be used to offset income in the lowest tax brackets and you may not be able to use your other itemized deductions.

Because of the complexity of the charitable contribution limitations, and the uncertain benefit of the charitable contribution relief offered by the Act, we strongly urge you to consult with us if you plan to make any large cash contributions before the end of 2005. You should note that the Act provides somewhat similar relief for C corporations and we would be glad to describe those provisions to you if you are interested.

Increased Mileage Rate for Use of Vehicle for Katrina Relief

Another portion of the Act allows an increased charitable contribution deduction for the use of a private motor vehicle in providing charitable relief related to Hurricane Katrina. Under normal circumstances, you are entitled to claim a deduction of 14 cents a mile when you use your car or other vehicle for charitable purposes. If you use your car after August 24, 2005 and before January 1, 2007 for volunteer services to a charity providing Katrina relief, you may take an increased deduction. If your vehicle is used after August 24, 2005, but before September 1, 2005, the rate is 29 cents per mile; if your use is after August 31, 2005, but before January 1, 2006, the rate is 34 cents per mile. The enhanced rate for travel after December 31, 2005 and before January 1, 2007, is 32 cents per mile.

Mileage Reimbursements Excluded from Gross Income

Some charities may choose to reimburse their volunteers for use of their private vehicles in connection with Hurricane Katrina relief efforts. The Act provides that such reimbursement will not be treated as taxable income to the volunteer, as long as: (1) the reimbursement does not exceed the IRS business mileage rates during the relevant period, and (2) the charity has established a system for accounting for the mileage and the payments.

Contributions of Food Inventory

The Internal Revenue Code already allows an enhanced deduction for charitable donations of inventory items, although it is limited to contributions by C corporations. The Act extends this treatment to a contribution of food inventory by any type of business, not just C corporations. This expansion of the deduction applies only to contributions made after August 27, 2005 and before January 1, 2006, although it is not limited to contributions made for Hurricane Katrina relief.

Contributions of Book Inventory

Another existing limitation on the enhanced deduction for charitable contributions of inventory items is that the donee must be a §501(c)(3) charity. For purposes of donations of book inventory by C corporations, the Act expanded the list of permissible donees to include public schools providing education at the K-12 level. This expansion of the enhanced deduction is not limited to donations for Hurricane Katrina relief purposes, but the contribution must be made after August 27, 2005 and before January 1, 2006.

We hope that this information will help you with your year-end charitable gift planning. As always, please consult with us before acting on any information in this notice.