5. Tougher donation rules
Tax breaks for charitable gifts provide rewards for both donors and their favorite nonprofit groups. In 2006, however, lawmakers decided some taxpayers had been pushing the goodwill envelope a bit too far.
So beginning on Aug. 18, any donated clothing or household goods must be in good or better condition. If the IRS determines it's not, or in official terms finds the items were of "minimal monetary value," the IRS can disallow the deduction.
The change was prompted by IRS suspicion that many taxpayers claimed excessive value for items that should have gone to the garbage dump instead of the charity box. The groundwork for this change was laid a couple of years ago when the IRS clamped down on valuations of donated autos.
And in 2007, the IRS is getting tougher on donation documentation. Previously, you had to get a receipt or other acknowledgement from a charity if you gave $250 or more. Now, for a monetary gift of any amount, you've got to have "a bank record or a written communication" from the charity detailing the group's name and the date and amount of the gift.
A canceled check is fine. If you charge a contribution, your credit card statement should be sufficient. Many charities also already provide a receipt for all monetary gifts, regardless of the amount.
"The most often asked question now," says LeValley, "is: How do I account for the cash I drop in the church collection plate each week?
"Think about making periodic pledges to your house of worship, usually larger donations on a quarterly basis. It might be easier to keep records that way."
6. Older philanthropist options
Some charitable giving, however, got easier thanks to tax-law changes. Now if you're 70½ or older, you can transfer money directly
from an IRA to a charitable organization. The option is available to either Roth or traditional IRA owners, but it is most beneficial when the money comes from a traditional account, since much of that cash is eventually taxed.
Taxpayers who must take
required minimum distributions from a traditional IRA but don't need the money to live on might find this donation option worthwhile. By going directly to the charity, the donated amount isn't included in the giver's taxable income, thereby lowering the filer's tax bill a bit.
However, taxpayers can't double dip by claiming a deduction for the contribution. For this reason, it might be valuable for taxpayers who otherwise wouldn't get a tax deduction, such as those who take the standard deduction instead of itemizing.
This new tax law, however, is temporary; it's only in effect for the 2006 and 2007 tax years.
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7. Kiddie tax tightened
In order to save for their child's college costs, some parents open accounts in the child's name. Not only does this designate the fund for the youngster's use, but it also had the tax advantage of having the earnings taxed at the youth's usually lower rate. That changed in 2006.