December 14, 2005
Published in Elegant Island Living Magazine
You may be able to save money on your taxes by using tax breaks included in a law passed after hurricane Katrina. The usual limit on deductions for charitable contributions has been waived for cash donated between August 28, 2005 and December 31, 2005. To take advantage of this law, you must act before the end of the year.
Under federal tax law, you can deduct a certain amount of charitable giving to reduce your federal income taxes if you itemize deductions. Deductions for donations to charity are limited to 50% of a your adjusted gross income (“AGI”). Charitable giving above your limit must be carried forward and may be deducted over the next 5 years, subject to the AGI limitation determined each year. The Katrina Emergency Tax Relief Act of 2005 (“KETRA”) allows a deduction for charitable contributions up to 100% of your AGI for 2005. To qualify for the increased limit, you must donate cash to a qualified charitable organization sometime between August 28, 2005 and December 31, 2005. Qualified organizations include churches, hospitals, schools, universities, and relief organizations that receive their support from the public (i.e. – Red Cross, Salvation Army, Goodwill, etc.). The donation does not have to be specifically related to hurricane Katrina relief.
For example, under the usual tax rules, if your AGI is $100,000 and you made a cash donation to the Red Cross for $60,000 you would only be able to deduct $50,000 (50% of your AGI). Under the new law, if you made your donation between August 28, 2005 and December 31, 2005 you would be able to deduct the entire $60,000.
If you made charitable donations before August 28, 2005 you must include those donations when determining your donation limit under KETRA. For example, if your AGI is $100,000 and you made a cash donation to the Red Cross of $40,000 on June 1, 2005 and then made another $70,000 cash donation on November 30, 2005, you would be allowed to deduct $100,000 of your donations. Although under KETRA your donation limit for the $70,000 is raised to 100% of your AGI, the donation of $40,000 early in the year counts against the $100,000 limitation and the deduction for the $70,000 donation will be limited to $60,000.
Because the donation limit is raised for this year, KETRA may also make it easier for you to take deductions for donations you had to carry over from earlier years. For example if your AGI is $100,000, you have $20,000 that you could not deduct from last year due to the AGI limitation, and you want to donate $50,000 this year, you will be able to deduct both the $50,000 and the $20,000 carry forward if your $50,000 donation complies with the KETRA rules.
If your AGI is greater than $145,950 ($72,975 if you are married filing separately), itemized deductions are usually limited. Although this rule generally will reduce claimed deductions for charitable donations, under KETRA this rule does not apply to cash charitable donations made from the end of August through December.
You can deduct unreimbursed expenses incurred while volunteering your time to a charity and 14 cents a mile if you drive while doing volunteer work. Under KETRA, if you use your car to provide volunteer services for relief related to Hurricane Katrina you can deduct 34 cents a mile for that travel.
The end of the year is just around the corner. Now is the time to think about whether additional charitable giving could lower your tax bill for this year.
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