MoneyLine by Neil Downing: Katrina donations might be deductible

If you're making a donation to help the victims of Hurricane Katrina, can you claim a federal income-tax deduction?

It depends. To be eligible, your donation must go to the right kind of charity. Even then, you may claim the deduction only if you itemize your deductions -- and only if you keep good records, said Steve Brylski, tax analyst at RIA of New York, a national publisher of tax and other information for accountants and other tax professionals.

That's the summary. Following are some details:

Eligible charity: First off, make sure the organization to which you donate qualifies as a charity under federal rules.

This is important because, in general, the Internal Revenue Service will allow the charitable deduction only for contributions made to a "qualified organization," said Angela M. Thomson, chairman of the Rhode Island chapter of the Financial Planning Association, a trade group for financial planners and others.

"As long as they're sending it to a qualified charity, [the donation generally is] tax deductible," Thomson said in an interview at Coastal Financial Planning, her fee-only financial-planning firm in Lincoln.

The big names that are associated with Katrina relief, such as the American Red Cross, pass this test. But if you're dealing with lesser known organizations, it's worth checking to see if they're listed with the IRS.

You can find out online by clicking on the link that's prominently displayed on the home page of the IRS Web site:

www.irs.gov

You may also check by calling the IRS toll-free at (800) 829-1040. (Keep in mind that some organizations, such as churches and government agencies, may be qualified even though they are not listed with the IRS.)

"We encourage citizens to make sure their contributions are put to the best use possible to help Hurricane Katrina victims," IRS Commissioner Mark W. Everson said in a statement.

Eligible taxpayer: Even if the charity to which you contribute qualifies under IRS rules, you still may not be eligible to claim a federal income-tax deduction for the amount you contribute.

You may claim the tax break only if you "itemize" -- in other words, only if you fill out a U.S. Form 1040 at tax time and file with it a separate list of all your deductions on a sheet known as Schedule A.

Most taxpayers don't itemize. Instead, they claim a lump-sum amount, known as the standard deduction. As a result, most taxpayers won't be able to claim a charitable deduction -- for Katrina relief or anything else.

So what will you do at tax time a few months from now -- claim the standard deduction, or itemize your deductions? It generally depends on how many deductions you have overall, and whether that total would exceed the standard deduction amount for which you're eligible.

The actual amount of the standard deduction varies depending on your filing status -- whether you're single or you're married and file a joint return, for example. Here are the main standard deduction amounts for 2005:

$5,000 if you're single.

$10,000 if you're married and file a joint return, or if you're eligible to file as a surviving spouse.

$7,300 if you file as "head of household," a category that's mainly for single parents.

As a general rule, it doesn't make sense to itemize if your total deductions don't exceed the standard deduction amount listed above for your filing status.

For instance, if you're single and all your deductions (including the one for charitable contributions) total $3,000, it probably doesn't make sense to itemize; you'd generally be better off claiming the standard deduction of $5,000.

Keep in mind that the standard deduction amounts listed above don't apply to everyone. For example, you may claim an extra amount if you're 65 or older, or blind. Also, some taxpayers simply aren't eligible to claim the standard deduction and should itemize.

If you do itemize, there are limits on how much you may deduct, but they're so high, you may not be affected. For example:

In general, your overall deduction for charitable contributions can't exceed 50 percent of your adjusted gross income. Adjusted gross income is generally your overall income, after adjusting for such things as alimony payments and moving expenses.

So if your adjusted gross income is $40,000 this year, $20,000 would be the most you could deduct this year, Brylski said. But you generally could carry over to the next year any charitable contributions you couldn't claim in the current year.

The overall amount of your itemized deductions -- including those for charitable contributions -- may be limited if your income exceeds a certain amount: generally, adjusted gross income of more than $145,950 for 2005.

Keeping records: If you itemize, make sure you keep a record of your contribution so you'll have some evidence to back up your charitable deduction. Here are the general rules:

If you make a donation of less than $250, a canceled check or credit card statement should suffice, Brylski said. But to be on the safe side, try to get a receipt from the charity, he said. The receipt should include such items as your name, address and the amount and date of your contribution.

If you make a donation of more than $250, the IRS won't let you claim a deduction unless you have a written ackowledgment from the charity, Brylski said. And you generally must obtain the letter from the charity shortly after you make the donation. The IRS "is kind of a stickler" about these rules, he said.

What's ahead: If recent history is any guide, keep an eye on Washington for the possibility of Katrina-related legislation that could affect you.

Remember when the tsunami struck in Asia late last year? Relief legislation was rapidly passed by Congress and signed into law by President Bush. As a result, taxpayers who made donations for tsunami relief in January 2005 got a break: they generally were allowed to claim the related deduction either for 2004 or 2005.

Hurricane Katrina is a domestic disaster. So don't be surprised if Congress quickly produces some related tax legislation.

One possibility: granting a limited charitable deduction even to taxpayers who do not itemize. President Bush has repeatedly made just such a proposal, but Congress hasn't yet gone along with it.

A few other points:

Today's MoneyLine provides only a general rundown on the complicated rules for charitable deductions and how they work. For more information, see IRS Publication 526, "Charitable Contributions."

For a free copy, visit your local IRS office, call the IRS toll-free line for forms and publications at (800) 829-3676, or read or download it from this IRS Web site:

www.irs.gov/formspubs

Also be sure to check your state's rules regarding tax breaks for which you may be eligible. For example, Massachusetts does not allow its residents to claim a state income-tax deduction for charitable deductions, but Rhode Island generally does.

A tax deduction probably isn't high on the list of reasons you're donating toward Katrina relief. Still, it's helpful to keep the tax break in mind, because it could save you money. For example, for every $100 you donate, you could save $15 in federal income tax if you're in the 15-percent tax bracket.

TODAY'S TIP: You've read or heard enough about flooding from Hurricane Katrina to know that homeowner's insurance doesn't cover flood damages.

But you may be eligible for some protection with a federal flood insurance policy. The Federal Citizen Information Center has a free brochure about the National Flood Insurance Program.

To order, send your name and address to: Federal Citizen Information Center, Dept. 596M, Pueblo, Colo. 81009. Or call toll-free at (888) 878-3256 and ask for Item 596M. Or read or download a copy at no charge from this Web site:

www.pueblo.gsa.gov

You may also obtain more information about the National Flood Insurance Program by calling the program toll-free at (800) 427-2419 or by using this Web site:

www.floodsmart.gov