Don(’t Infl)ate Gifts to Charity!

Dear Gail-

Every day I drive to work past a billboard that urges me to donate my used vehicle to a local charity. Since I just got a nice raise, I’m finally at a point where I can afford to trade in my current clunker for a better car. I wouldn’t mind giving it to this charity because I support the work they do. I’ll get a tax deduction, right?

Thanks,
Rachel

Dear Rachel,

The short answer to your question is: “Yes.”

The long answer starts with, “Yes, but …”

As I wrote last year shortly after its passage, the Pension Protection Act (PPA) significantly tightens rules that determine the size of the tax deduction you can take for making donations to charity.

These have been incorporated in the just-released update of I.R.S. Publication 561, “Determining the Value of Donated Property.” You can read or download a copy at www.irs.gov. Click on “Forms and Publications.” You might also want to peruse Publication 526, “Charitable Contributions.”

In the case of used clothing or household goods (furniture, kitchen utensils, bedding, etc.) you are not entitled to any deduction at all unless the items are in at least “good” condition. To be on the safe side, you should list and describe the condition of each item.

If you have no idea what something is worth, head to the Salvation Army’s “valuation guide,” which lists low and high estimated values for specific items of clothing as well as household goods ranging from curtains to refrigerators. You’ll find this at www.satruck.com/ValueGuide.asp.

Suzanne Coffman, director of communications for GuideStar, a great resource for researching charities (www.guidestar.org), says she prints the estimated price list out and staples it to her inventory of donated items. Since a printed Web page always includes a date, if she’s ever audited, she “can prove that at the time I made the donation, this was the ‘fair market value’” of the various items donated.

If your donation consists of something that is not in “good” condition, but is none-the-less valuable — for instance, a piece of vintage clothing or an antique table — and you are claiming a deduction of more than $500, you must get a qualified appraisal. A copy of this has to be attached to your tax return.

The cost of an appraisal is not considered a charitable contribution. Instead, it should be deducted as a “miscellaneous itemized expense.” Unfortunately, you don’t see any benefit from this unless the total amount of your deductions in this category exceeds 2 percent of your adjusted gross income.

Starting January 1st of this year, you cannot deduct any charitable donations made in cash (check, credit card, etc.) unless you receive a dated receipt or have some other written form of proof.

If you receive anything of value from the charity in return (dinner at the annual fundraiser, a set of CDs, etc.), this reduces the amount of your contribution and, thus, your deduction.

(Heaven help the Salvation Army bell-ringers. I can’t imagine them giving out a receipt to everyone who drops a handful of coins into their red kettles during the holidays! Hopefully, this won’t stop people from continuing to be generous.)

Giving a large item such as a vehicle or boat entails additional paperwork if you’re claiming that it’s worth more than $500.

As with clothing or household goods, the amount you can deduct is the “fair market value” (FMV) of your car. However, you can’t simply look this up in a price guide or on the Internet and assume your clunker is worth the “high” price listed.

Even if it were in cherry condition, the value of your vehicle will vary based on what part of the country you live in. Moreover, the “high” price is probably what a dealer would charge.

If you want to base your tax deduction on the value quoted in a used vehicle pricing guide, you have to use the estimated price you’d get if you sold the car yourself to a private party. This is usually considerably less than the retail price a dealer would ask.

But even this may not be correct. “Before you can determine how much you can deduct, you have to know how the charity is going to use your vehicle,” says Coffman. In many cases, an organization will turn around and sell it at a used car auction. In this case, the fair market value of your car — and your tax deduction — is limited to the amount your car went for at auction. You should receive a statement from the charity detailing this.

On the other hand, if the charity plans to use your car in its work, you can probably use a number less than the “retail” value listed in a price guide. That is, unless you are claiming the car is worth more than $5,000. In this case, you must get it appraised. You’ll also have to fill out I.R.S. Form 8283 and attach this to your tax return.

Congress has toughened up the rules about charitable donations for a couple of reasons: it wants to make sure that organizations claiming non-profit status (i.e. non-tax status) are legitimately engaged in charitable activities. In addition, there is skepticism that many of us taxpayers are not quite as generous as we profess to be.

According to the Giving USA Foundation, here are the total charitable deductions claimed by American taxpayers in key years:

1990: $81.0 billion

1995: $95.4 billion

2000: $175.0 billion

2005: $199.1 billion

Notice that in the 5-year periods from 1990 to 1995 and from 2000 to 2005, the total amount of charitable contributions claimed increased by 18 percent and 14 percent respectively. However, charitable deductions nearly doubled from 1995 to 2000, posting an increase of 83 percent!

I know this was the period of the dot.com bubble, but how many of us really benefited from that? The size of the deductions claimed in 2000 is even less plausible when you recall that 2005 was the year Americans responded to Hurricane Katrina and the other major storms that devastated the Gulf Coast.

Over-estimating the value of your contribution has serious consequences. If you get audited, you’ll not only have to pay the additional tax owed, there will also be a penalty. In cases where someone significantly over-estimates the value of his/her charitable contribution, this can range from 20-40 percent.

So give generously. But give with your eyes wide open.

Hope this helps,
Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.