Your old stuff can save you big tax dollars
Feeling a need to simplify your life? Getting rid of some of that old stuff cluttering up the house could be just the answer.
You're probably aware that when you give clothes and household goods to charity, you can claim a tax deduction. It can be a valuable part of your deduction considerations if you itemize in your returns. But many people sell themselves way short by undervaluing their deduction claims.
Whether it's sweaters or sewing machines, trousers or typewriters, blouses or bicycles, the system is the same.
"Most people take a bunch of old clothes, throw it into a bag and toss it into a dumpster outside a Goodwill or Salvation Army building," says Tony Anchukaitis, a CPA, CFP and PFS with Canby, Maloney & Co. Inc. in Framingham, Mass.
Your papers, please
But these people are missing a key ingredient according to Anchukaitis, "Documentation is key to how much you want to claim for donations. If you want a big number deduction, keep track of the items and their receipts -- the more documentation you have, the higher a deduction you can claim."
Documentation is the best way to arm yourself against money-grabbing government agents. But documenting is no easy task.
According to the Internal Revenue Service, a taxpayer can deduct the fair market value of clothing and household goods. Fair market value is defined as "the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts."
But the IRS doesn't have an exact formula or method for you to establish fair market values, so what you write down is completely subjective. The IRS does, however, offer vague guidelines.
With regards to fair market value, Ken Hubenak of the IRS Media Relations office says, "It's something YOU have to determine. All the main rules are laid out in Publication 561, Determining the Value of Donated Property and Publication 526, Charitable Contributions ."
A former IRS agent who can speak more freely, but asked to remain anonymous, adds, "a sweater is a sweater. It doesn't matter if it was a $2,000 sweater from Nieman Marcus or a $20 sweater from Kmart." He adds that most donated clothing goes to homeless people, so they don't care where the sweater came from.
By following these guidelines, you'll be able to receive maximum tax benefits when donating used clothing and household goods.1. Give your items to a qualified organization -- an organization that has a tax-exempt status with the IRS. To find out if the organization is qualified:
- Ask the charity if the IRS has qualified it.
- Read the charity's literature to ensure that it is fully recognized
by the IRS.
- Check IRS Publication 78, Cumulative List of Organizations . which lists most qualified organizations.
2. Assign a fair market value to the items that you're donating.
- You can't claim a fair market value that is more than the original cost of that item.
- CFP Ken Pikor of Westerville, Ohio, who is also an "enrolled agent" (someone who can represent taxpayers before all administrative levels of the IRS) says, "If you happen to be like my wife who saves all her clothing receipts and files them, a good rule to follow when valuating used clothing/items, is to use 25 percent of the original purchase price as a guide when determining the donated value."
3. Keep a detailed record of your donated items, including:
- The number of items and the condition they're in.
- The dates you received or bought the items -- if you don't know exact dates, use approximate dates.
- The original purchase prices.
- A quick snapshot or video of the items you're donating -- this will substantiate your contribution if questions ever arise. Keep the visual record with your tax records.
- Signed and dated receipts from the organization receiving your donations -- when Goodwill asks you, "Do you want a receipt?" say "yes."
4. Report your charitable deductions on Schedule A of Form 1040.
5. The value of your charitable deductions can't be more than 50 percent of your adjusted gross income in any single year. Donations exceeding the 50 percent limit can be carried forward to future years.
6. When you donate more than $500 worth of goods to charity, you must include Form 8283, Noncash Charitable Contributions . with your tax return.
7. If your claimed deduction is more than $5,000, you must get an appraisal from a qualified appraiser and attach an appraisal summary (Section B of Form 8283) to your tax return. A qualified appraiser is someone authorized to complete Part III, Declaration of Appraiser. of Section B.
Dealing with large donations
You may be thinking that a donation of more than $5,000 is out of your league. But consider this, if a relative dies or moves into a nursing home, donating their sheets and towels, furniture and kitchen utensils, may be the most practical way of cleaning up. The total fair market value of a large donation like that could easily top $5,000.
The best way to deal with an extraordinarily large donation, says Peter Jason Riley, a CPA in Newburyport, Mass. "is to put a note on your return, claiming that it's a donation from a deceased person or an estate situation."
A note explaining the circumstance may just help you avoid facing that dreaded IRS audit.Source: www.bankrate.com