September 30, 2014
With tax season 2014 fast approaching, a few tips regarding donating property seem in order.
Specifically, clothing, household items and cars are the most common items donated to qualified organizations.
To receive a tax deduction, you need to donate the property to a qualified organization. A qualified organization includes nonprofit groups that are religious, charitable, educational, scientific or literary in purpose, or that work to prevent cruelty to children or animals.
If you ask organizations whether they are qualified, most will be able to tell you.
The IRS has an online resource at IRS.gov. Click “Tools” and then “Exempt Organizations Select Check.” This online tool will allow you to search for qualified organizations.
The general rule regarding contributed property is that the amount of the charitable contribution is the fair market value of the property at the time of the contribution.
There are some special rules regarding clothing and household items. You cannot take a deduction for clothing or household items you donate unless the items are in good used condition or better.
The IRS is trying to stop people from donating items that are basically worn out and of no use to anyone. So, unless your donated items are in good condition, you will not be allowed to take a charitable contribution deduction.
Now let’s define the term “household items.” Household items are considered to be furniture, electronics, appliances, linens and other items. Some examples of items that are not considered household items include food, paintings, jewelry and collectibles.
Used clothing and household items are usually worth far less than what you originally paid for them. These items are difficult to value because they do not lend themselves to fixed formulas or methods.
A good habit to follow is to prepare a detailed list of the items you plan to donate. You should put a value on every item donated. Located next to the item should be its thrift shop value.
What thrift shops are selling the various used clothing and household goods items for is a good indication of the fair market value. Some of these thrift shops and charities actually have price lists that you can use as a guide.
Determining the fair market value of a car you donated is no problem if the value of the donation you are claiming is $500 or less. You can use a used car guide or a blue book to determine the fair market value of the donated car.
When using one of these guides, you should be honest about the condition of the vehicle. Very few people have cars in excellent condition. Most cars would probably fall into the average category. In addition, use the private sale price, not the higher dealer retail value.
If you are claiming a deduction of more than $500 for the car, the rules are a little more complicated. You will be able to deduct the smaller of the actual sales price of the vehicle received by the donee organization or its fair market value on the date of the contribution.
The donee organization will provide you with a Form 1098-C, which shows the gross proceeds from the vehicle sale. This 1098-C form must be attached to your return if you are mailing it in or transmitted as a PDF file if your software program allows you to attach it.
If you do not attach your Form 1098-C in some fashion, the deduction for the car will be disallowed by the IRS. This form serves as a type of control mechanism against taxpayers claiming inflated values for the used cars that they have donated – a problem with this type of donation in the past.
The key to donating clothing, household items and cars successfully is to know the rules for determining fair market value. Be reasonable when you are applying those rules. And always request some type of documentation from the charity when you donate.
This article was originally posted on September 30, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at email@example.com.