Cash Charitable Contributions: What You Need to Know
Cash Charitable Contributions: What You Need to Know It’s the Most Wonderful Time of the Year Part I of a Year-end Series While the holiday season can be a source…
December 16th, 2019
While the holiday season can be a source of great joy and celebration, it also can be a stressful time for tax professionals facing a myriad of year-end questions. One of the most asked questions involves charitable contributions. Our first installment examined cash contributions. We’ll concentrate our attention this time on noncash charitable contributions.
So to begin, we need to determine the fair market value of the property being donated to a qualified charity.
Fair market value (FMV) is the price that property would sell for on the open market between a willing buyer and a willing seller, with neither being required to act.
For a donation of a noncash item worth less than $250, your taxpayer needs a receipt from the charity at the time they make the donation. It doesn’t need to be turned in with their tax filing, but should be retained along with their other tax records for the year.
If the donated noncash item is worth more than $250 but not more than $5,000, the taxpayer needs a contemporaneous written acknowledgement from the charity, which meets IRS guidelines.
If they donated property worth $500 to $5,000, not only do they need the contemporaneous written acknowledgment, they also need to provide written proof that supports the item’s purchase date, its fair market value, and how much it cost them. You’ll need this information to fill out IRS Form 8283, Noncash Charitable Contributions. The client should keep the backup proof with their tax records, it doesn’t get submitted with the return. Just a note here to mention many taxpayers enter $499 on Schedule A so they don’t have to submit the Form 8283. I think that’s a mistake and IRS has concluded in audit with this author that such a number is just made up. Others have been told that Form 8283 is an audit flag. I can tell you I have filed hundreds of these over my 28 years of tax return preparation experience and have never had one challenged (knock on wood).
For donated clothing and household items, the items must be in “good condition or better.” (Do you really think charities want old underwear and socks?) However, if your client attaches a written qualified appraisal for an item that’s not in good condition or better they can claim a deduction for something that is only in “fair” condition like an antique that could still be quite valuable even though the condition isn’t very good.
If the taxpayer wants to attempt a deduction for more than $5,000, they generally need all of the written documentation I’ve mentioned above PLUS a written qualified appraisal. This normally weeds out the client who wants to take a $10,000 deduction for the truckload of clothes taken to Goodwill. There are appraisal requirements depending on what kind of property is being donated (see link on “qualified appraisal” above) except for publicly traded securities which are reasonably easy to determine the value.
Cars, planes, and boats have special rules which must be followed. Your client will need to know if the charity is selling the item or keeping it. If they sell it like that annoying “Kars 4 Kids” ad promotes, the deduction is usually limited to the amount of money the charity receives when it sells the item. The charity will send your client documentation as to how much they received for the item. If the charity retains the item or regifts it, you can refer to a source such as Kelly Blue Book to help your client determine a FMV based on a number of factors. I would encourage you, however, to not go beyond private party values.
The IRS has a very useful resource with discussion and examples for all kinds of donated property. I encourage you to go to https://www.irs.gov/publications/p561
Best of luck during this giving season.
By Tom O’Saben, EA
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