THE NEW IRS RULES – DEDUCTING CLOTHING AND HOUSEHOLD GOODS

Have you heard that the recently signed Pension Protection Act restricts the way that you can contribute goods to charities? Yep! The IRS is tightening the reins on what you can deduct as a charitable contribution on your tax return.

Today I am talking about the impact of this law on contributing clothes and household goods to charities.

Per the IRS, in 2003, more than $9 billion (yes, billion!) of clothing and household goods were claimed as deductions.

The new law, as of August 18, 2006 (the day after the President signed the bill) will limit the items that you can give to your favorite charity.

The Act says that the deduction of clothes and household items will not be allowed unless the item is in “good used condition or better.” Also you can’t deduct an item of “minimal value.” Huh?

First let’s discuss the definition of “good used condition or better.” Oops! There is no tax definition.

I went to various charity websites to see how they defined it. The websites tend to encourage you to give “new or gently used” goods or to donate “sellable items”.

Goodwill’s charity website has a “donation do list” that reminds you to test electrical and battery operated items and to be sure that all of the parts and pieces are included in children’s toys. This type of list could be help you decide on a “gently used condition.” Check your favorite charity’s website and see if there is guidance. Before giving to a charity, a good question to ask is “Is it good enough to sell?”

There is an exception on the “good condition.” If you have an item that is in so-so condition but you are determined to get some kind of tax benefit for it, here is the way to do it:

You pay a “qualified appraiser” to value the item. If its value is more than $500, you can deduct it as a contribution as long as you attach that written appraisal to your tax return. And you get to ignore its condition!

And how do you determine if an item is of minimal value? In the new Tax Act, the only explanation was on a “committee report” that mentioned “used socks” as a having a minimal value.

It’s expected that the IRS will consult with charities to determine what items are not of meaningful use to the charities and then maybe we will have a better understanding of “minimal value.

There is a side effect of this new law. It will help charities stop receiving so much junk. Charities say that they toss anywhere from 5% to 10% of clothing and household goods received.

That’s it for today. Next time I will talk about the 2007 restrictions on giving cash to a charity.

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