Cleaning out your closet could be a great way to cut your tax bill and be philanthropic at the same time. If you itemize deductions, you can write off charitable contributions of as much as 50% of this year’s adjusted gross income, and if you exceed that amount, you can carry over the remainder for future tax years. You get the same benefits as an owner of a partnership, limited liability company, or S corporation when the business donates property to eligible charities. And a C corporation can take charitable deductions on its own tax return.
Still, Internal Revenue Service rules governing gifts of tangible personal property—anything you can see, touch, or feel, excluding land or a building—are complex, as a reading of Publication 526 quickly reveals.Under the “Pease rule,” deductions for upper-income donors may be slightly reduced. In a condittion, you must keep copious records. Therefore, it’s important to know the requirements and follow them carefully.
The size of your deduction depends on myriad factors, such as whether the donated property is worth less now than when new—usually the case for a late model used car, for example, and most clothing. With such gifts, you can generally deduct the item’s fair market value, or street value. Websites like autos.yahoo.com can help you approximate what a car is worth, taking into account its age and condition; for clothing, the fair market price might be what you’d get selling to a thrift shop. For donations of household items, a deduction is allowed only if the item is in good condition.
When you give away non-business property that has appreciated, you may deduct its fair market value as long as you have owned the property for more than a year and the charity anticipates using it in a way related to its tax-exempt purpose. For instance, you qualify if an art museum accepts your artwork and agrees to display it. A big advantage of giving away appreciated collectibles such as fine art, vintage wines, and guitars signed by the Beatles, is that your profit from selling them would be taxed at 28%. That’s almost double the usual 15% rate for capital gains (20% for certain upper-income donors).
You won’t make out nearly as well with gifts of appreciated business property or if the charity plans to sell your donation. In such instances, you can usually deduct only the asset’s basis. For business property, such as outdated computers, that’s the original cost minus depreciation write-offs you’ve taken. For personal assets you’ve inherited, it’s what the gift is worth on the day the executor values the estate—either the date of death or six months later. For a gift you’ve received, the basis is what the original owner paid. So if your great aunt gives you a white mink coat she bought in 1958 for $250, that’s all you’re entitled to deduct if you donate the fur for auction at a church fair, even if the coat fetches more.
For every non-cash gift, you’ll need a receipt or acknowledgment from the charity showing the date and location of the donation and a reasonably-detailed description of the gift. For gifts of $250 or more, the charity’s written acknowledgment must also say whether you received goods or services in return.
In addition, you must keep your own written records, including the terms of any conditions attached to your gift and how you figured your deduction. Deductions of more than $500 require you to substantiate how and when you obtained the donated property, and your basis in it. If that’s not available, you must explain why in an attachment to your tax return in order to get the deduction.
If you deduct more than $5,000 for a single donated item or group of similar items, such as a coin collection, you’ll need a written appraisal and the qualified appraiser’s signature on IRS Form 8283, which you must file with your tax return. Someone from the organization that received your gift must also sign the form and indicate whether the charity intends to put the property to an unrelated use.
So give, and your magnanimity will be rewarded—as long as you keep good records and don’t overestimate the value of your generosity.
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