Convert Unused Items Into a Tax Deduction
When you give away items like clothing, appliances, vehicles, and other goods to a qualified charity, your generosity can add up to a tax deduction if you itemize your deductions. The amount of your tax deduction is generally the donated property’s “fair market value.” The IRS definition of fair market value (FMV) is “the price a willing buyer would pay and a willing seller would accept for an item, when neither party is compelled to buy or sell and both parties have reasonable knowledge of the relevant facts.”
Below are guidelines to help determine FMV for the most common types of non-cash donations (miscellaneous personal items) that have decreased in value since they were acquired:
• Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the FMV of used clothing and other personal items is usually much less than what you paid for them.
• Household Goods: The value of used household goods (e.g., furniture and appliances) is also much less than their original cost. If the property is worn, inoperable, or out of style, it may have little or no market value. However, photographs, purchase receipts, and newspaper ads describing similar property should help support a valuation.
• Cars and Other Vehicles: The deduction is limited for motor vehicles (as well as for boats and airplanes) contributed to a charity for which the claimed value exceeds $500 by making it dependent upon the charity’s use of the vehicle and imposing higher substantiation requirements.
If the charity sells the vehicle without any “significant intervening use” (actual, significant use of the vehicle to substantially further the organization’s regularly conducted activities) or “material improvement” (e.g., major repairs), the donor’s charitable deduction cannot exceed the gross proceeds from the charity’s sale. The charity will issue form 1098-C which includes details of the sale.
Where significant intervening use occurs, the deductible amount is the FMV of the vehicle. The “Blue Book” value is a good place to start in determining the vehicle’s FMV. However, Blue Book values generally assume the car to be in good condition and allowances must be made for the actual condition of the vehicle.
Non-cash contributions must be properly documented with a contemporaneous written acknowledgment from the charity if the total deduction claimed for a donation is valued at $250 or more. The acknowledgment must be obtained on or before the earlier of the date the tax return is filed, or the extended due date for the return. It must include the name of the charity, a description (but not value) of the donation, and one of the following:
■ A statement that no goods or services were provided by the charity in return for the contribution, if that is the case;
■ A description and good faith estimate of the value of goods or services, if any, that the charity provided in return for the contribution; or
■ A statement that goods or services that the charity provided in return for the contribution consisted entirely of intangible religious benefits, if that is the case.
If the FMV of the donation claimed is greater than $5,000, a written appraisal must be made by a qualified appraiser no more than 60 days before a vehicle or other similar property is contributed. The appraisal must be received before the extended due date of the return on which the deduction is claimed. In addition, Section B of IRS Form 8283 must be completed, including the signature of an authorized official of the charity.
If you have questions about how this tax provision might apply to your specific tax situation, please give us, Bressler & Company, a call at 559.924.1225.