Charitable deductions: IRA donations and conservation easements

On July 17, 2014, the House passed legislation called the “America Gives More Act of 2014” (H.R. 4719).

The bill contained “tax extenders” for two charitable tax breaks that could expire, but are normally renewed for one or two years at a time. In addition, there were two new ideas. One would provide an extension until April to make charitable gifts. The other simplifies the excise tax rates for private foundations.

While these provisions still need to pass the Senate, we will explain the provisions in more detail in this post.

In our May 27 post, we discussed the tax treatment of withdrawals from Traditional IRAs. Some IRA owners can avoid paying income taxes by making a charitable contribution. The tax extender would continue to allow IRA owners 70 1/2 years or older to exclude up to $100,000 of income when IRA funds are given directly to a charity.

This can help taxpayers who do not usually itemize deductions. It also avoids paying tax on income and later needing to claim a deduction.

Conservation easement deductions put in place in 2006 expired on December 31, 2013. An extension of these deductions would allow a taxpayer to reduce adjusted gross income by up to 50 percent by making a conservation donation. An unused carry-forward provision would expand the potential write-off period from five to 15 years.

The first of the new ideas would give taxpayers until the tax filing deadline to make charitable contributions. This would be a change from the rush to make donations prior to year-end.

Private foundation would no longer need to operate under a two-tier excise tax under the proposed change. They would pay one percent on all investment earnings. The simplified rule would reduce administrative burdens.

When calculated improperly or inflated, charitable tax deductions often lead to IRS tax litigation, back taxes and penalties. For example, an appraiser’s method could be questioned in valuing a conservation easement. Because policies and the law change frequently, consult a tax attorney if you have questions about planned charitable tax deductions.

Source: Forbes, “4 Charitable Tax Giving Tax Breaks In Play,” Ashlea Ebeling, July 18, 2014.