The tax deduction is the fair market value of the donated items, or their original tax basis (cost) if lower.  Inherited items that are donated have a tax cost of their value when inherited, so donating inherited items can result in a significant tax deduction.

 

Documentation of donations is needed for donations of any dollar amount.  Donations in excess of $500 require an additional tax form to be included in your return, but the rules for donations less than $500 are basically the same.  Therefore, it’s best to learn the rules that apply to donations over $500 to keep it simple.  In addition to a receipt from the organization you make the donation to, you need to demonstrate how you calculated the value of the donated goods. 

 

Valuing Your Donation

   

A taxpayer might document their donation by describing the donation as 2 or 3 bags of clothing with an estimated value of $200.  This approach not only fails to document the value of the clothing, in most cases it understates the deduction.  Without creating a list of the quantity of items and each individual item’s value, a taxpayer cannot accurately determine the donation’s value.  However, 3 bags of clothing often totals 60 items that have an average value in a thrift store of $10 each, or $600.  In this example, the taxpayer would take a much higher deduction, and be able to successfully document the deduction if audited.  

 

 

Organize the items you are donating into similar items

(in this example we assume clothing is donated)

 

• Add up each category of clothing donated, such as men’s or women’s pants, shirts, suits, dresses, shoes, etc.

• Count the number of items in each category, add up the number of items for each category, and multiply the quantity by the value of each category.  For your convenience, I have posted an Excel worksheet that will make this task easier (above).  The worksheet is complete with calculations that will automatically total the values if you enter the quantity and value for each line item.

• Take a picture using your cell phone or a camera of the stacks of clothing.

• Pick up a receipt from the charitable organization when you donate your items, and attach your worksheet calculating the deduction.  The receipt should include the wording “no services or item of value received”.   Since many organizations often give you a blank receipt that they expect you to fill out, write down a basic description of the donation and this phrase on the receipt, and ask the attendant to sign it. Documentation should be obtained prior to the extended due date of your tax return.

 

There are slightly different rules to what information needs to be documented depending on whether the donation is under $250, under $500 or more than $500, so to keep things simple. I would stick with the rules that apply to donations valued at over $500; this will help keep you in compliance when addressing smaller donations: 

 

• Name and address of organization you make the donation to.

• Description of items donated.

• Date of donation, and date of purchase or acquisition (“various will generally suffice for date of purchase).

• Value and cost (value at date of inheritance, or if a gift, original cost of the gift).

• Method of valuation (generally “fair resale value”).

 

Special Rules to Know

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1. Clothing and household items must be in good condition (no junk), unless the item has appreciated in value.

2. Donations must be made to a qualifying charity.  Although a donation to a needy individual doesn’t qualify, you could make an arrangement with a local charity you are associated, such as your church, to donate the items to the organization, and then agree to deliver the items to the intended recipient on behalf of the organization.  This would require something in writing authorizing this.  Foreign charities do not qualify either, but often have a US-based associated charity than can handle the donation.

3. Appreciated items have special rules.

4. A donation worth more than $5,000 requires an appraisal.

5. Deductions for cars worth more than $500 are limited to the amount for which the organization sold the car, and requires certain written documentation from the organization.

 

Please email matthew@msabrams.com with any questions you have.