Spring cleaning may help you find that some of your one-time treasures have turned into trash—which could mean treasure not only for those who are less fortunate but for you in potential tax deductions. Use these guidelines to assess that potential.
Is it worthwhile for you to donate?
Deductions come from your adjusted gross income. Make contributions in years that your itemized deductions (eligible medical expenses, long-term care expenses, interest, etc.) are more than the IRS standard deduction.
A donation must meet four requirements to be considered charitable:
- It must be given to an organization the IRS deems a qualified charity. For more information, see Publication 526 at www.irs.gov.
- No part of the organization’s earnings can benefit any private individual.
- No substantial part of the organization’s work can consist of propaganda or legislative activities.
- You must make the contribution in cash or property before the close of the tax year for which you take the deduction.
Establish the donation’s real value
- The Treasury Department says you must establish the item’s fair market value (FMV) at the time of the donation. FMV is the price an item would sell for on the open market between a willing seller and a willing buyer. This can be determined by the cost or selling price, the sale of comparable property, the replacement cost, or the opinion of experts.
- Clothes, computers, sofas, stocks, artwork, land, or cars all vary tremendously in how FMV is determined.
- Download a copy of “Determining the Value of Donated Property” from the IRS website, www.irs.gov. This addresses FMV, the valuation of different types of property, appraisals, and penalties, and also provides sources for more information.
- Overstating the value of property can result in a penalty of 20 percent to 40 percent of the tax underpayment.
- Assign a value consistent with what an organization that resells such items charges for them. Check www.goodwillpromo.org for how it valuates children’s, women’s, and men’s clothing; housewares; appliances; sporting goods; and furniture.
- Be warned: you will often not receive anywhere close to the retail price you paid for high-ticket items. It might be more sensible to consign your items to a local secondhand shop and make a cash donation to the charity instead.
- Know what percentage of the organization’s revenue goes to the charity’s stated purpose, as opposed to the percentage used to run the organization. Obviously, the less money spent on administrative costs (salaries, office rent, etc.) means more money goes to help others.
- Get the organization’s annual report or check with the state Attorney General’s office for the organization’s legitimacy.
- Get a signed receipt that states the value assigned to your donation and hold onto it until tax time.