The bulk of the Pension Protection Act is intended to compel employers to shore up their pension plans. In addition, it will in many ways encourage more non-defined pension plans including 401K’s and 403B’s in lieu of defined plans. Presently, many pensions are under funded, which means that promised pension benefits would exceed the funds available, leaving pensions short of money. The Pension Protection Act of 2006 "requires most pension plans to become fully funded over a seven-year period" starting in 2008, according to a CCH tax briefing.
According to a press release by Sen. Grassley, the pension bill includes a “good package of charitable giving incentives and loophole closers.” Grassley commented, “It makes sense to tighten areas of abuse while increasing incentives for charitable giving. Americans are very generous with their donations. They deserve to know that their money helps the needy, not the greedy.” Grassley thanked Sen. Santorum, Republican of Pennsylvania who he said was especially helpful in developing the giving incentives, and the Panel on the Nonprofit Sector, who Grassley said, “represented many of the nation’s charities in a comprehensive effort to study ways to improve the non-profit sector”.
To achieve full pension funding, the new law allows employers to deduct the cost of making additional contributions to fund the pension, provides strict funding guidelines, and imposes a 10% excise tax on companies that fail to correct their funding deficiencies.
Charitable IRA Donations
The good news for charities is that The Pension Protection Act allows taxpayers to donate money to charity directly from their IRA account. The distributions will be tax-free and avoid the penalty on early withdrawals. Taxpayers are allowed to donate up to $100,000 per year from their IRA. Since the distribution will not be included in taxable income, individuals will not be able to claim a tax deduction for the charitable contribution.
Individuals won't get a tax deduction for the contribution. So why should they do it?
At age 70 ½ individuals must start taking a minimum amount of money out of their IRA each year. The Money taken out is added to your adjusted gross income, and is subject to federal and state taxes.
If the same amount is donated to charity, the amount qualifies for a tax deduction but it doesn’t negate the full amount of the tax. That is because the amount of the IRA withdrawn is still in adjusted gross income, which may affect a number of things. The amount many have been enough to place the individual into a higher tax bracket; an increase in adjusted gross income would also reduce the deduction for medical and other expenses and personal exemptions. Likely, the higher adjusted gross income would increase income tax on Social Security benefits.
With the new allowable Charitable IRA donation, a donation of money directly from the IRA to a charity would never show up in the adjusted gross income, eliminating the possibility of higher taxes. Charitable IRA donations also fully qualify as a portion or the entire minimum amount of money required to be withdrawn from IRA’s belonging to individuals age 70 ½ and older.
Stricter Rules on Charitable Donations
The Pension Protection Act toughens the tax laws for charitable donations. Effective in 2007, to qualify as a deductible expense, taxpayers must now keep records of all cash donations. Individuals must show a receipt from the charity, a canceled check, or credit card statement to prove their donation. No tax deduction will be allowed if the taxpayer cannot provide any supporting documentation. Previously, receipts were required if an individual monetary gift was $250 or more.
Taxpayers will not need to mail in the receipts with their tax return. Instead, taxpayers will need to keep receipts and other documentation with their copy of the return in the event of an IRS audit.
The new law also toughens the rules for non-cash donations. Donated items, such as clothing and household goods, must be in good used condition. While the new law does not define “good condition” the law does specify that no tax deduction will be allowed for items in less than good condition. In addition, for non-cash donations in excess of $500, taxpayers will be required to file a qualified appraisal for the donated property.
Future legislation
The “Panel on the Nonprofits” which included ECFA participation along with nineteen other national organizations, reviewed and commented on a number of other charitable provisions of which some are still likely to ultimately become law. Sen. Charles Grassley, mentioned above and the sponsor of the Pension Reform act commented, “I look forward to working with the same individuals to put together more legislative proposals to increase governance, transparency, and accountability in the non-profit sector."
