The Internal Revenue Service (IRS) will allow workers and employers donating their paid days of vacation to victims of Katrina to get a tax benefit. Usually contributions to charity can only be written off by those who itemize their taxes but this IRS rule is an exception that applies to those who can itemize and those who cannot.
“I think this is a great avenue for people who want to provide relief,” said IRS Commissioner Mark W. Everson speaking with the Los Angeles Times. “They can give in a way that might be easier than giving cash. And from a tax standpoint, I think it’s very attractive.”
This rule allows companies to establish “leave-based donation programs” for hurricane victim relief. From worker contributions, the company will write a check to relief organizations. This temporary rule will apply until the end of 2006.
There are savings for the workers contributing their paid vacation and the companies making the actual contributions to relief organizations. The prime benefit may be that both would not pay employment or income taxes on the dollars donated.
The worker also does not need to declare the donated dollars as income saving themselves federal and state tax payments and payments toward Medicare and Social Security. Companies would save paying 7.65% on the final value of donated paid vacation also. The donation of paid vacation time is basically converted into tax-free cash and one-third cheaper for many middle income workers according to the Los Angeles Times.
Companies may be reluctant to create these programs though. There will be a need to adjust employee benefit plans and even internal payroll systems. Some companies have internal programs that allow the donation of vacation time to other employees of the company but programs donating vacation time to those outside of companies are rare according to the Los Angeles Times.
“I think employers are trying to do as much as they can to help victims of Katrina,” said James Klein, the president of the American Benefits Council speaking with the Los Angeles Times. “Among the panoply of things that are being considered, I think this is one that will be of appeal to some employers. Exactly how many will avail themselves of it, I don’t know.”