<< Continued from Part I
6. Saving the Saver's Credit
The Saver's Credit was also made permanent. This tax break, created to reward lower-income workers who put money into a retirement account, was set to expire at the end of 2006. Now eligible workers can continue to claim the credit, which could cut up to $1,000 off a filer's tax bill. And next year the income levels used to determine eligibility and actual credit amounts will be indexed for inflation. This should allow more taxpayers to take the credit or at least keep many from becoming ineligible.
While the new pension law technically was designed to address retirement issues, it contains several tax provisions in other areas.
7. Tax-free 529 distributions
One of the most welcome nonpension provisions is the permanent continuation of tax-free withdrawals from Section 529 college savings plans. The tax exclusion had been scheduled to expire at the end of 2010. There is a bit of a retirement connection: With the 529 tax-free option now in full and perpetual force, some parents and students won't have to resort to tapping IRAs to pay for school.
Charities, and those who give to them, also got some special attention in the pension law, not all of it to taxpayer liking.
8. Proving donated goods' value
IRS officials have long suspected that taxpayers inflate the value of donated items. The law had been changed this year to tighten rules on donated cars. Now a similar approach is being taken in evaluating the deductibility of donated clothing and household goods.
The IRS can now deny deductions for goods that are of "minimal monetary value." Specifically, the law requires that these items be in good used condition or better.
How will the tax examiner know? When you give goods, you have to fill out Form 8283, Noncash Charitable Contributions, detailing your generosity, and send it in with your return. True, taxpayers can still inflate the used property's value there, but with the new guidelines, tax examiners might be looking at this form, and asking follow-up questions, more than usual.
This new requirement will likely get more attention in December, as folks make year-end donations to maximize annual charitable write-offs.
9. More record keeping
The IRS also wants you to get more substantiation for your cash gifts, which include actual dollars, checks and credit card donations.
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. And many charities already provide a receipt for all monetary gifts, regardless of the amount.
You don't have to send these contribution confirmations in with your return. Just have them on hand if the IRS asks. And the tougher substantiation rule doesn't take effect until 2007, so you don't have to reconstruct all those smaller amounts you gave earlier this year.
10. Giving away IRA money
One new charitable tax provision will please older philanthropists and the groups they support.
If you are 70½ or older, you can have money from your IRA sent directly to a charitable organization. This is most beneficial to traditional IRA holders, since much of the money in these accounts is eventually taxable, but the option also is available to Roth account holders.
The main benefit for taxpayers is that the IRA gift keeps the donated amount out of the giver's taxable income tally, thereby lowering the filer's tax bill a bit.
It could also be a worthwhile giving method for filers who otherwise wouldn't get a tax deduction, such as those who take the standard deduction.
Many older filers claim the standard amount, says Scharin, because they get a larger standard deduction than younger taxpayers. They also are more likely to have paid off or paid down their mortgages, meaning they no longer have it and other large amounts to itemize.
"If someone is claiming the standard deduction, they're not getting charitable contribution tax benefits anyway," Scharin says, "so now you can at least avoid paying tax on the IRA distribution."
This also might be a good strategy for individuals who face donation limits based on their income. Generally, you cannot donate an amount that exceeds 50 percent of your adjusted gross income. But when the money goes directly to the charity from the IRA, it doesn't count against that limit because it's not included in gross income, says Scharin.
If this giving technique works for you, and you're old enough to use it, make plans now. This provision is only in effect for 2006 and 2007.
And remember that no double dipping is allowed. Since this distribution is tax-free, if you do itemize you cannot deduct the gift on your Schedule A. The ability to keep the money out of your taxable income, however, should help offset the deduction loss.
Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin, Texas, and blogs on tax topics at Don't Mess with Taxes
