Don’t let this happen to you. “We are disallowing the [non-cash charitable donation] receipt dated 05/12/07 and one item on the receipt dated 10/15/09. The reason these are being disallowed is because we need a list of the items that were donated,” explains the IRS to a taxpayer being audited.
Determining the value of non-cash contributions is quite subjective. While pretty much every other tax break is calculated based on the amount of money spent during the year, contributions of clothing and household items are claimed based on an estimate of the fair market value of each item donated. Since this provides taxpayers with an opportunity for exaggeration, non-cash contributions are definitely on the IRS’ radar screen.
A few years back, the federal government took steps to reign in these potentially overstated values. On August 17, 2006, President Bush signed the Pension Protection Act of 2006 into law, which contained a provision limiting the deduction to donated goods that are in good condition or better. As part of this change, the IRS now requests a list of each item donated, including its condition and fair market value, from most taxpayers who are being audited.
Please don’t panic and stop claiming a tax deduction for your donated goods. Simply remember to document the clothing and household items given away during the year. Plus, make sure to complete and attach aForm 8283 to your federal tax return in any year that the total value of donated goods exceeds $500. For non-cash donations totaling more than $5,000 in one calendar year, you’ll need to obtain and include a written appraisal with your federal return.
Let’s take a look at the guidelines provided by the IRS to help taxpayers comply with this new standard. According to the instructions to theForm 8283 – Non-cash Charitable Contributions:
The FMV of used household items and clothing is usually much lower than when new. A good measure of value might be the price that buyers of these used items actually pay in consignment or thrift shops. You can also review classified ads in the newspaper or on the Internet to see what similar products sell for.
More information is available on IRS Publication 526 – Charitable Contributions, where the IRS states:
The fair market value of used household items, such as furniture, appliances, and linens, is usually much lower than the price paid when new. These items may have little or no market value because they are in a worn condition, out of style, or no longer useful. For these reasons, formulas (such as using a percentage of the cost to buy a new replacement item) are not acceptable in determining value.
You should support your valuation with photographs, canceled checks, receipts from your purchase of the items, or other evidence. Magazine or newspaper articles and photographs that describe the items and statements by the recipients of the items are also useful. Do not include any of this evidence with your tax return.
UDoGood Can Help
Properly valuing your donated clothing and household items has become more important in the post August 17, 2006 “Good or Better” world. If you ever get audited, there is a good chance that the IRS will use this new higher standard as a way to greatly reduce the deduction they will allow you to claim unless you can:
- Substantiate that the donated goods were in good condition or better, and
- Demonstrate how you came up with the Fair Market Value you claimed
To help you put a value on the donated goods, we recommend that you check out UDoGood, an easy (and fun) App for the iPhone and iPod touch that helps you document, photograph and record your charitable donations of clothing and household goods.
Hopefully this new tool will help you provide sufficient documentation to the IRS if you ever get audited. While we don’t recommend that you exaggerate the value you claim for the items you’re donating, we do believe you should take the full deduction based on the fair market value of the stuff you gave away.
Understanding the new rules and documenting what you give away will help ensure that the deduction you claim on your tax return will withstand reasonable scrutiny from our friends at the IRS.