Giving Your Vacation Break to Katrina Victims

If you want to give to hurricane relief but worry that you couldn’t take a tax deduction because you don’t itemize, Internal Revenue Service Commissioner Mark W. Everson has a deal for you: Donate vacation time and you’ll get a tax benefit no matter how you file your return.

“I think this is a great avenue for people who want to provide relief,” said Everson, the nation’s top federal tax official, in an interview last week. “They can give in a way that might be easier than giving cash. And from a tax standpoint, I think it’s very attractive.”

Normally, the 88.5 million American taxpayers who don’t itemize deductions can’t take write-offs for giving to charity. But the program Everson kicked off last week creates an exception to that rule. The IRS has approved a temporary regulation that would allow companies to create “leave-based donation programs” to provide help for hurricane victims from now until the end of 2006

These programs would allow employees to essentially give away their vacation time. The company in turn provides a check for the value of the vacation days to a relief organization.

The donated time could be hours that the employee had “banked,” or it could be time yet to be accrued, said Rose Stanley, compensation and benefits manager at WorldatWork, a Scottsdale, Ariz.-based association for compensation and benefits professionals.

“This is a very attractive idea,” Stanley said. “Some employees may not have cash to donate -- and that’s what everybody is asking for right now -- so they may feel that this is the only way they can give.”

From a tax standpoint, both the company and the worker get a benefit, noted Philip J. Holthouse, a partner at Santa Monica tax law and accounting firm Holthouse, Carlin & Van Trigt. Neither the company nor the employee would pay employment or income taxes on the donated dollars. This is a departure from past practice, under which the donating employee would have to claim the value of donated vacation as taxable income.

For the company, that is likely to save 7.65% of the value of the donated vacation time -- that’s the employer’s contribution to Social Security and Medicare.

The employee saves because he or she doesn’t take the vacation dollars as income, which would require paying state and federal income taxes as well as the employee portion of taxes that go to Social Security and Medicare.

If the employee gives cash instead, he or she would have to earn the money, pay tax on it and then donate. Donating the hours, which the company turns into tax-free cash, is at least one-third cheaper for most middle-income workers.

There’s one catch: You may have to urge your employer to go along with the deal. Vacation time can be donated only through an employer, and employers might be reluctant because they’d have to adjust their employee benefit plans -- and possibly tweak internal payroll systems -- to offer the program.

At present, relatively few companies have internal leave-swapping programs, but more are seriously considering it, said Ophelia Galindo, a principal at Mercer Human Resource Consulting’s absence management group in Newport Beach.

However, those programs essentially allow employees of one company to give paid time off to one another, not to people outside the company. Taking advantage of the new IRS rule would require cashing out vacation time to donate the value outside the company, and such programs are rare, she said.

It’s too soon to know whether employers will launch these plans in response to the hurricane, other experts added.

“I think employers are trying to do as much as they can to help out victims of Katrina,” said James Klein, president of the American Benefits Council. “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.”

The only other time that the IRS has offered a similar program was after the terrorist attacks in 2001, Everson said. Few companies took the offer, he acknowledged.

Still, the tragedies are significantly different, he noted. Because Hurricane Katrina has displaced hundreds of thousands of families, potentially for long stretches, the needs of its victims are likely to linger far into the future.

The IRS consequently is allowing the tax-favored donations to be made for a longer stretch: until the end of next year. Everson believes that will spur more companies to take advantage of the program and provide much-needed relief.

“We think this will take shape over time,” he said. “If we have gone through the vacation season for this year, people can plan ahead to donate next year’s vacation time. We are trying to provide maximum flexibility. But it may take a little time to build.”

Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, visit latimes.com/kristof.