The folks who oversee the Internal Revenue Service (yes, even the auditors get audited) recently discovered that roughly one-quarter of taxpayers who took a tax deduction for donating valuable stuff to charity didn't substantiate their gifts.
These taxpayers evidently overlooked a new requirement that they fill out a special form and provide documentation when donating something worth more than $500 to charity. Donate something really valuable, worth more than $5,000, and you may even need an appraisal.
The Treasury Inspector General for Tax Administration estimated that all this sloppy paperwork may mean that taxpayers wrongfully claimed tax deductions worth $1.8 billion over about eight months last year. Since it's tax time, and both Congress and the IRS have been taking a heightened interest in the tax deductions people claim for donating their stuff, it's probably a good time to review the rules.
Turning junk into money
First, know that you can get a pretty good tax perk for donating your unwanted belongings to a qualified charity. If you're wondering whether your charity is qualified, check the IRS website.
Tax laws let you deduct the fair market value of your old belongings if you itemize your deductions. The key is that even though you might consider it old junk, it must be in good condition or better to qualify for the tax break.
Let's say you've cleaned out your closets and decided to finally donate those old suits that will never fit again (or at least not until they're hopelessly out of fashion). They're in good condition, even if you can't button the pants anymore. You can claim as a deduction the amount that you'd pay to buy the same suits in a used clothing or resale shop. The same is true for your household goods, from toasters to furniture.
Who determines whether your stuff is in good condition? Occasionally, charities will turn away items they believe may be too damaged to sell. Some charities offer donors guidelines for valuing their donations. Mostly, though, it's up to you to make that decision and to be able to substantiate it just in case the IRS comes calling. A statement from the charity, or even a picture, can help you prove your case.
Things to watch out for
Here's one wrinkle in these rules. If you're donating something that's not in good condition, but it has a value of $500 or more and you get a qualified appraisal, you may still qualify for a tax deduction.
You aren't going to be able wipe out your entire tax liability with deductions for donating every scrap of unwanted stuff in your house, from mismatched socks to recycled sporks. In fact, the rules deny deductions for things of minimal value. However, if you do a good spring cleaning, you may be surprised at how quickly these small donations can add up.
You'll want to gather receipts for everything you donate, and that's mandatory for donating anything worth $250 or more. If you donate something worth more than $500, that's when you need to fill out the special form.
You'll be asked the name of the charity, the date of the gift, your cost for purchasing the item, and its appraised value. Truly generous types who donate $5,000 or more will need a written appraisal to back up their claims.
Not too much of a good thing
Just so you know, there are some limits to the generosity of these laws, but they're too high for most people to worry about. Technically, you can only deduct donations that amount to less than either 50% or 30% of your adjusted gross income. It's 50% for most cash and property donations, but 30% for property that has appreciated in value, such as paintings and other collectibles.
So go hunt down those receipts for any donations you made last year and make plans to clean out the basement. You might plump up your refund enough to make all that paperwork worthwhile!
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For more useful hints to help you save on your taxes, check out the Fool's Tax Center.