Convert Unused Property into a Tax Deduction

As we approach the season for spring house cleaning it may be appropriate for you to really clean house and get rid of all those clothes that no longer fit and all those household items you never use.  They have the potential of providing you with 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 write-off if you itemize your deductions. The amount of your deduction is generally the donated property's “fair market value.” The IRS definition of 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 on the most common types of non-cash donations (miscellaneous personal items) that have decreased in value since the time they were first acquired:

• Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the fair market value of used clothing and other personal items is usually much less than what was paid for them. A guideline is to claim as the value the price that buyers of used clothing actually pay in used clothing stores, such as thrift stores and consignment shops, for similar items. Generally, the tax code requires that the clothing be in good used condition or better before a deduction is allowed.  In addition, items of minimal monetary value, such as used socks and undergarments, are generally not deductible.

• Household Items: Household items include furniture, furnishings, electronics, appliances, linens, and other similar items.  Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition of household items. The value of used household goods 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. For these reasons, the IRS does not accept formulas such as a percentage of original or replacement cost as a way to determine FMV. Like used clothing, the items must generally be in good used condition or better before a deduction is allowed. Establishing true value can be difficult.  Some charities do that for you while others do not.  If you are making a substantial contribution, it may be appropriate to visit a thrift shop to get an idea of how to value your contribution.  Photographs, purchase receipts and newspaper ads describing similar property should help support a valuation.

Documentation Requirements for Non-Cash Contributions – The documentation required depends upon the value of the contribution.  The higher the value, the more complicated the documentation requirements become.

Deductions of Less Than $250 - A taxpayer claiming a non-cash contribution must obtain and keep a receipt from the charitable organization showing the name of the charitable organization, the date and location of the charitable contribution, and a reasonably detailed description of the property.  In addition, the taxpayer must keep a record of the FMV at the time of the contribution and how it was determined.  A taxpayer is not required to have a receipt where it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).  Caution: this rule is based on the total deduction claimed for the year and not on individual contributions made during the year.

Deductions of At Least $250 But Not More Than $500 - If a taxpayer claims a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, he or she must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made by more than one contribution of $250 or more, a taxpayer must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution.  The acknowledgment(s) must be written and include:

1. The name of the charitable organization;

2. The date and location of the charitable contribution;

3. A reasonably detailed description (but not necessarily the value) of any property contributed;

4. Whether or not the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits); and

5. If goods and/or services were provided to the taxpayer, the acknowledgement must include a description and good faith estimate of the value of those goods or services.  If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony), that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.

Deductions Over $500 But Not Over $5,000 - If a taxpayer claims a deduction over $500 but not over $5,000 for a non-cash charitable contribution, they must have the same acknowledgment and written records as for contributions of at least $250 but not more than $500 described above.  In addition, the records must also include:

o How the property was obtained.  For example, by purchase, gift, bequest, inheritance, or exchange.

o The approximate date the property was obtained or, if created, produced, or manufactured by the taxpayer, the approximate date the property was substantially completed.

o The cost or other basis, and any adjustments to the basis, of property held less than 12 months and, if available, the cost or other basis of property held 12 months or more. If the taxpayer is not able to provide information on either the date the property was obtained or the cost basis of the property, and there is reasonable cause for not being able to provide this information, a statement of explanation can be attached to the return.

Deductions Over $5,000 - If the taxpayer claims a deduction of over $5,000 for a charitable contribution of one property item or a group of similar property items, they must obtain acknowledgment from the charitable organization and have the written records described in the “Over $500 But Not Over $5,000” section above.  In determining whether the deduction is over $5,000, combine the deductions for all similar items donated to any charitable organization during the year.  Generally, the taxpayer must also obtain a qualified written appraisal of the donated property from a qualified appraiser.

For all donations that require an acknowledgment from the charitable organization, the taxpayer must obtain the acknowledgment by the earlier of the date the taxpayer files his or her tax return for the year of the contribution or the extended due date of that return (usually October 15 of the year following the donation year).

If you have additional questions related to non-cash contributions, please give this office a call.

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