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New legislation has recently been passed by the House and Senate to encourage charitable contributions to all public charitable organizations. This legislation stemmed out of a need for increased private support for the Hurricane Katrina relief effort. Charitable contributions of cash made between August 28, 2005 and December 31, 2005 will be fully deductible without limitations against a donor's adjusted gross income.

Hurricane Katrina Relief Bill

The Hurricane Katrina relief bill, unanimously passed by the House and Senate on September 21, and signed into law by the president on September 23, has made changes to tax law designed to encourage certain outright gifts of cash made during the period August 28, 2005 – December 31, 2005. Since 9/11, Americans have truly shown their generosity by helping others in times of trouble. We have seen this in the aftermath of 9/11, during the Tsunami Disaster, and now again for Hurricanes Katrina and Rita.

Congress acted quickly to pass this bill in hopes of encouraging Americans to give more to help support the recovery effort from Hurricane Katrina's devastation. However, in an effort to encourage all charitable giving, including to those organizations who might otherwise have received gifts that have instead gone to Hurricane Katrina efforts, Congress has approved a tax incentive for gifts to all public charitable organizations.

Highlights of this new legislation include:

• The contribution limit for certain outright gifts of cash has increased from 50 percent of adjusted gross income to 100 percent of adjusted gross income.
• These same outright gifts of cash also are exempt from the three-percent reduction in itemized deductions for individuals with an adjusted gross income over $145,950.
• A contribution to a public charity, whether or not that charity is engaged in Katrina relief, and whether or not the contribution is unrestricted or for a designated purpose, would qualify.
• These changes may present some donors with an attractive opportunity to fund outright gifts with assets withdrawn from an IRA or other qualified retirement plans.

Maximum cash contributions

Under existing law, the maximum amount of cash contributions that is deductible in any one year is 50 percent of adjusted gross income. That limit is being increased to 100 percent of adjusted gross income in the case of certain cash gifts made during the stipulated period: August 28, 2005 - December 31, 2005.

Reduction rule

Still another benefit of making qualified cash gifts before the end of the year is that they will not be subject to the reduction rule applicable to itemized deductions. In general, a taxpayer's itemized deductions must be reduced by three percent of the amount by which adjusted gross income exceeds $145,950. However, there is no such adjustment for qualifying cash contributions made from August 28 through December 31. As with the 100 percent contribution limit, all donations made prior to August 28 and non-cash donations made at any time in 2005 will continue to be subject to this three-percent reduction rule.

An opportunity for people with IRAs and qualified retirement plans

Due to the increase in the deduction limit, people who have more money in their IRAs or other qualified plans than they will likely need for retirement security, and who are at least 59 and 1/2 years of age, may want to consider withdrawing assets and contributing them to a charity. Upon withdrawal, the assets, as before, will be added to adjusted gross income, but the full amount added to income will then be deductible from income, resulting in a "wash."

Before taking such action, donors should consider how increasing their adjusted gross income may reduce the amount they can deduct for medical expenses and casualty losses, accelerate the phase-out of personal exemptions, and cause some loss of other itemized deductions. Although the amount withdrawn from an IRA or other qualified plan and then contributed will not be affected by the three-percent reduction in itemized deductions, other itemized deductions, as well as the personal exemption, may be diminished with a rise in adjusted gross income.

Notwithstanding these possible consequences, withdrawing and contributing assets from an IRA or other qualified plan during this window of opportunity may make sense for some donors.

Conclusion

Norwich is pleased to have the opportunity to share this new legislation with you and hopes you will take advantage of the opportunity to give a little more this year, whether that is to the Hurricane Katrina Relief effort, other organizations you normally support, or Norwich University. Please note that due to the complexity of deductibility issues, donors should consult their tax advisors about both the optimum amount to contribute in 2005 and the advisability of making contributions from their IRAs or other qualified plans.