January 12, 2005
Tsunami Relief and Charitable Contributions
John J. M. Lareau, CPA
|Over the past two weeks we have all been inundated with pictures and excerpts of the horrors the tsunami has caused to the people of Indonesia, Sri-Lanka, Indiaand beyond. At GRKB, our thoughts and prayers go out to those victims of the December 26, 2004 tragedy.With relief aid pouring into the region at record pledge levels of over $4 billion, GRKB offers its clients and the general public the following tax related information. As the engines of American caring and generosity are revved once again, please keep in mind the following so that support can be submitted in the most cost and tax efficient manner.Many governments have promised relief for the victims and countries affected by the disaster across the world, including the United States, from which President Bush has promised around $350 million. Of equal importance to government aid is the charity of individuals and corporations. Recognizing the same, the United States Congress, led by Sen. Baucus (D-MT) and Rep. Thomas (R-CA), have passed a provision, signed by President Bush on Jan. 7th, which allows for charitable contributions made in January 2005 to be deducted on taxpayer’s 2004 tax returns.|
1. Contributions made in January 2005 qualify as December 31, 2004deductions
2. Contributions must be made in cash
3. Deduction election is allowed only for relief to victims of the December 26, 2004 Indian Ocean tsunami
4. States’ tax treatment may vary
5. Make contributions only to qualified organizations
6. Obtain written, contemporaneous support of contributions.
|The special provision allows taxpayers to treat contributions made in January 2005 as a contribution made on December 31, 2004, giving them the option to deduct the contribution in 2004 or 2005. The deduction requires no additional form(s) or reporting and taxpayers, from a recordkeeping standpoint, should separate January 2005 deductions from other deductions to avoid duplicating the deduction.The election, in essence, to ‘back-date’ the deduction is available for cash contributions only. The Internal Revenue Service has clarified that checks qualify, but presumably, cash equivalents such as money orders and credit card contributions would also qualify under current regulations for charitable contributions.|
|The provision specifies that the contribution must be made as relief to victims in areas affected by the December 26, 2004 Indian Ocean tsunami. It is recommended that taxpayers identify contributions as such, for example, by including notation of the purpose of the contribution in the memo field of checks. Additionally, taxpayers should also use caution when contributing to funds that provide relief to victims of multiple disasters and should specify that their contribution be earmarked as relief for the December 26, 2004 tsunami victims.For most states allowing a deduction for charitable contributions, the election should also be available for state tax purposes. Depending on the specific jurisdiction, most state provisions ‘piggy-back’ the federal deduction. Therefore, without further action by the states – as seen during the bonus-depreciation decoupling debacle – the deduction could be used for state tax purposes. Here in Massachusetts, the deduction for charitable contributions, as voted by the citizens, has been temporarily postponed by the legislature until certain fiscal benchmarks are met by the state. Therefore, the state tax treatment is moot for full-year Massachusetts residents.The most important part of making a tax-deductible contribution is making sure the contribution is made to a qualified organization. Contributions to foreign organizations are generally not deductible. Therefore, contributions made for overseas disaster relief are usually made through domestic conduit organizations (set up to maintain expenditure responsibility). Qualified domestic charitable organizations are required to provide a copy of their IRS exemption letter upon request and GRKB clients are specifically reminded to obtain written, contemporaneous proof of contributions from recipient organizations. Directors and trustees of private foundations, in particular, should use caution in providing grants for overseas relief to avoid costly taxable expenditures. Also, certain States’ Attorneys General have warned of unscrupulous characters falsely soliciting contributions for the tsunami disaster relief. Suspicious solicitation activity can be reported directly to the Massachusetts Division of Public Charities of the Office of the Attorney General at (617) 727-2200.
As always, feel free to contact your GRKB advisor for guidance on transaction planning and execution.