Now that summer is upon on us, it might be a good time to go through your closets and clear out a little room while you have some more free time. Despite what you may have heard, making donations of property is not as scary or tricky as some have made it out to be.
The rules on donating items is very clear – always get a receipt. If you donate more than $500 in “stuff,” be sure to fill out Form 8283 Noncash Charitable Contributions as you go because the tax man will want to see documentation for everything nowadays. If you aren’t sure how to value your property, be sure to read Publication 561 Determining the Value of Donated Property. There are also free tools like ItsDeductible which will help you value and store donated items all year long so you’re ready to go at tax time.
Now’s an excellent time to go through some of your clothes to see if there are a few items you want to get rid off. My personal rule is that if you haven’t worn it in a year and it’s still in good condition, donate it. If you no longer fit in it, donate it. You don’t need to keep old clothes lying around taking up space and enticing bugs and other critters to set up shop. Fortunately, it’s very easy to value your clothing donations.
If there is a piece of furniture in your home that you are ready to get rid of, call up your local Goodwill or Salvation Army to see if they will take it. If it’s in reasonably good condition, they will take it. By donating furniture, you help yourself out in two ways. First, you get the tax deduction for the fair market value of the piece of furniture. Second, you don’t have to haul it yourself because the charity will send a truck to pick up the furniture for you.
Electronics are tricky because by the time you usually stop using something, it’s obsolete and has very little by way of market value. If that’s the case, consider recycling instead of donating the item, which may be your only option if you can’t find any charities willing to accept it. If you’re having trouble, look for charities that specialize in refurbishing or repairing the piece of electronics you’re thinking about donating.
Stocks & Bonds
Donating appreciated stock is one of the best ways you can cut your tax bill and help out a charity is a big way. When you donate stock, you get the deduct it’s appreciated value regardless of what you’ve paid for it. If you purchased $100 in stock and it appreciated to $500 when you donated it, you get to deduct $500 from your taxes. Not only that, you don’t pay capital gains taxes on the appreciation. If, however, the stock has lost value, it’s better to sell the stock first and then donate the cash proceeds. You are able to deduct capital losses against capital gains, so deducting the loss is better for tax purposes.
For everything else, just get a receipt of the fair market value of the item you donate and make sure it passes your own personal sniff test with regards to the deduction. In the end, the charity will let you know if they are interested in your donation so you can use that as a guide. Anything from old appliances to home tools is fair game, donate whatever you no longer need but can still be used by someone else.
$5,000 Appraisal Rule
If you have a receipt, the IRS will usually take your claim at face value. If, however, you claim a deduction of more than $5,000, the IRS will want you to get an appraisal of the item. When you get an appraisal, be sure to document everything and get as complete an appraisal as necessary. The IRS will want to see the qualifications of the appraiser, his or her demonstrated knowledge of the property, and must give all the facts necessary for an independent auditor to make a similar determination. This rule also applies if you donate a single item of clothing or a household item valued at more than $500. You may not take a deduction for the cost of the appraisal.
There are exceptions to this rule, such as in the case of publicly traded stocks or bonds, as the price is publicly known on the valuation date. Finally, in the case of deducting property, only property valued at over $500,000 must be appraised.
I hope this helps you clean out a bit of the junk you may have stuck in your attic and reduce your tax bill for 2010!
Jim writes about money issues at his personal finance blog Bargaineering.com.