‘Tis the season for celebrating and giving back as Americans make up almost a third of their annual charitable donations during the month of December.
In fact, according to National Giving Month:
- One-third (31 percent) of annual giving occurs in December.
- 12 percent of all giving happens in the last three days of the year!
- 28 percent of nonprofits raise as much as 50 percent of their funding in December.
Americans Donate Nearly $500 Billion to Charity Each Year
Americans give nearly $500 billion to charities each year, and all those donations can affect tax returns. Still, it is important to understand the rules for documenting charitable donations, especially when it comes to non-monetary items.
“The end of the year is near, and that's when charities — and consumers — make a push for charitable giving,” reported Tina Orem and Ramona Paden for NerdWallet, who highlighted that:
- Charitable contributions or donations can help taxpayers to lower their taxable income via a tax deduction.
- To claim a tax-deductible donation, you must itemize your taxes.
- Your donation must meet certain guidelines to qualify.
- The amount of charitable donations you can deduct may range from 20 percent to 60 percent of your adjusted gross income (AGI).
“Generally, you can only deduct charitable contributions if you itemize deductions on Schedule A (Form 1040), Itemized Deductions,” advises the IRS. “Gifts to individuals are not deductible. Only qualified organizations are eligible to receive tax-deductible contributions.”
Make Sure You Document Your Donations Properly for IRS
Like any subject involving the IRS and taxes, it can get a bit tricky to understand all the charitable donation rules. Here are some key things to consider when you give this year:
- If you receive a benefit in exchange for the contribution such as merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can only deduct the amount that exceeds the fair market value of the benefit received or expected to be received.
- For contributions of cash, check, or other monetary gift (regardless of amount), you must maintain a record of the contribution: a bank record or a written communication from the qualified organization containing the name of the organization, the amount, and the date of the contribution.
- In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations.
- For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property other than cash contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. One document from the qualified organization may satisfy both the written communication requirement for monetary gifts and the contemporaneous written acknowledgment requirement for all contributions of $250 or more.
- You must fill out one or more Forms 8283, Noncash Charitable Contributions, and attach them to your return if your deduction for each noncash contribution is more than $500. If you claim a deduction of more than $500, but not more than $5,000 per item (or a group of similar items), you must fill out Form 8283, Section A. If you claim a deduction of more than $5,000 per item (or a group of similar items), you must obtain a qualified appraisal of the item or group of items and fill out Form 8283, Section B. If you claim a deduction of more than $500,000 for a contribution of noncash property, you must fill out Form 8283, Section B, and attach the qualified appraisal to your return.
- Special rules apply to donations of certain types of property such as automobiles, inventory, and certain other readily valued property.
Determining the Value of Donated Property
Perhaps one of the biggest questions taxpayers have is how to properly determine the value of property they donate.
“To figure how much you may deduct for property that you contribute, you must first determine its FMV (fair market value) on the date of the contribution,” says the IRS.
What is FMV? FMV is the price that the property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.
Example for Calculating FMV: If you give an item of used clothing that is in good used condition or better to the Salvation Army, the FMV would be the price that typical buyers pay for clothing of this age, condition, style, and use. Usually, such items are worth far less than what you paid for them.
Factors to Consider: In making and supporting the valuation of property, all factors affecting value are relevant and must be considered. These include, but are not limited to:
- The cost or selling price of the item,
- Sales of comparable properties,
- Replacement cost, and
- Opinions of experts.
“Determining the value of the donated property would be a simple matter if you could rely only on fixed formulas, rules, or methods. Usually, it is not that simple. Using such formulas, etc., seldom results in an acceptable determination of FMV,” says the IRS. “There is no single formula that always applies when determining the value of property. This is not to say that a valuation is only guesswork. You must consider all the facts and circumstances connected with the property, such as its desirability, use, and scarcity.”
Factors to Consider When Figuring FMV for Donations
The cost of the property to you or the actual selling price received by the qualified organization may be the best indication of its FMV.
However, because conditions in the market change, the cost or selling price of the property may have less weight if the property was not bought or sold at a time that is reasonably close to the date of contribution.
The cost or selling price is a good indication of the property's value if:
- The purchase or sale took place close to the valuation date in an open market.
- The purchase or sale was at “arm's-length.”
- The buyer and seller knew all relevant facts.
- The buyer and seller did not have to act.
- The market did not change between the date of purchase or sale and the valuation date.
The sales prices of properties like the donated property are often important in determining the FMV. The weight to be given to each sale depends on the following.
- The degree of similarity between the property sold and the donated property.
- The time of the sale—whether it was close to the valuation date.
- The circumstances of the sale—whether it was at arm's length with a knowledgeable buyer and seller, with neither having to act.
- The conditions of the market in which the sale was made—whether unusually inflated or deflated.
Replacement Cost: The cost of buying, building, or manufacturing property like the donated item should be considered in determining FMV. However, there must be a reasonable relationship between the replacement cost and the FMV.
The replacement cost is the amount it would cost to replace the donated item on the valuation date. Often, there is no relationship between the replacement cost and the FMV. If the supply of the donated property is more or less than the demand for it, the replacement cost becomes less important.
To determine the replacement cost of the donated property, find the “estimated replacement cost new.” Then subtract from this figure an amount for depreciation due to the physical condition and obsolescence of the donated property. You should be able to show the relationship between the depreciated replacement cost and the FMV, as well as how you arrived at the “estimated replacement cost new.”
Opinions of Experts: Generally, the weight given to an expert's opinion on matters such as the authenticity of a coin or a work of art, or the most profitable and best use of a piece of real estate, depends on the knowledge and competence of the expert and the thoroughness with which the opinion is supported by experience and facts. For an expert's opinion to deserve much weight, the facts must support the opinion.
Problems Determining FMV for Donations
There are several problems in determining the FMV of donated property including:
- Unusual Market Conditions: The sale price of the property itself in an arms-length transaction in an open market is often the best evidence of its value. When you rely on sales of comparable property, the sales must have been made in an open market. If those sales were made in a market that was artificially supported or stimulated so as not to be truly representative, the prices at which the sales were made will not indicate the FMV.
- Selection of Comparable Sales: Using sales of comparable property is an important method for determining the FMV of donated property. However, the amount of weight given to a sale depends on the degree of similarity between the comparable and the donated properties. The degree of similarity must be close enough so that this selling price would have been considered by reasonably well-informed buyers or sellers of the property.
- Future Events: You may not consider unexpected events happening after you donate property in making the valuation. You may consider only the facts known at the time of the gift and those that could reasonably be expected at the time of the gift.
- Using Past Events to Predict the Future: A common error is to rely too much on past events that do not fairly reflect the probable future earnings and FMV.
How to Value Various Kinds of Donated Property
Here are some tips from the IRS on how to value various kinds of donated property:
- Household Items: The FMV of used household items is usually much lower than the price paid when new. Household items include furniture, furnishings, electronics, appliances, linens, and similar items. Household items do not include paintings, antiques, objects of art, jewelry, gems, and collections like stamp and coin collections. Such used property may have little or no market value because it may be out of style.
- Used Clothing: Used clothing and other personal items are usually worth far less than the price you paid for them. The value of items of clothing does not lend itself to fixed formulas or methods. The price that buyers of used items pay in used clothing stores, such as consignment or thrift shops, is an indication of the value.
- Jewelry and Gems: Jewelry and gems are of such a specialized nature that it is almost always necessary to get an appraisal by a specialized jewelry appraiser. The appraisal should describe, among other things, the style of the jewelry, the cut and setting of the gem, and whether it is now in fashion. If not in fashion, the possibility of having the property redesigned, recut, or reset should be reported in the appraisal. The stone's coloring, weight, cut, brilliance, and flaws should be reported and analyzed. Sentimental personal value does not affect FMV.
- Paintings, Antiques, and Other Objects of Art: Your income tax charitable contribution donation of paintings, antiques, and other objects of art, for which you claim a deduction of more than $5,000 must be supported by a qualified appraisal and a Form 8283. Special rules apply for art valued at $20,000 or more and art valued at $50,000 or more.
- Collectibles: The most common are rare books, autographs, sports memorabilia, dolls, manuscripts, stamps, coins, guns, music and entertainment memorabilia, comics, toys, and natural history items. Publications available to help you determine the value of many kinds of collections include catalogs, dealers' price lists, and specialized hobby periodicals. When using one of these price guides, you must use the current edition at the date of contribution.
- Cars, Boats, and Aircraft: If you donate a car, a boat, or an aircraft to a charitable organization, its FMV must be determined. An acceptable measure of the FMV of a donated car, boat, or airplane is an amount not more than the price listed in a used vehicle pricing guide for a private party sale, not the dealer retail value, of a similar vehicle. However, the FMV may be less than that amount if the vehicle has engine trouble, body damage, high mileage, or any type of excessive wear. The FMV of a donated vehicle is the same as the price listed in a used vehicle pricing guide for a private party sale only if the guide lists a sales price for a vehicle that is the same make, model, and year, sold in the same area, in the same condition, with the same or similar options or accessories, and with the same or similar warranties as the donated vehicle.
- Stocks and Bonds: The value of stocks and bonds is the FMV of a share or bond on the valuation date.
- Real Estate: Because each piece of real estate is unique and its valuation is complicated, a detailed appraisal by a professional appraiser is necessary. The appraisal report must contain a complete description of the property, such as street address, legal description, and lot and block number, as well as physical features, condition, and dimensions. The use to which the property is put, zoning and permitted uses, and its potential use for other higher and better uses are also relevant.
- Annuities, Interests for Life or Terms of Years, Remainders, and Reversions: The value of these kinds of property is their present value, except in the case of annuities under contracts issued by companies regularly engaged in their sale.
Remember to substantiate your noncash charitable contributions you may need three types of documents:
- Contemporaneous Written Acknowledgment (CWA).
- Form 8283.
- An appraisal, which in some cases must be a “qualified appraisal,” completed by a “qualified appraiser.”