A column on personal finance prepared by the Virginia Society of Certified Public Accountants
THE TAX BENEFITS OF DONATING PROPERTY
November 21, 2003) – Thinking about making a year-end charitable contribution? If so, keep in mind that tax-deductible donations are not limited to cash. According to the Virginia Society of CPAs, many organizations accept gifts of used cars, computers, clothes, art and other types of tangible property. In return, taxpayers who itemize may qualify for a valuable tax deduction.
Generally, when you contribute property to a qualified charitable organization, you can deduct the fair market value of the property at the time of the contribution. According to the IRS, the fair market value is the price a willing buyer would pay a willing seller, when neither is compelled to buy or sell, and both have reasonable knowledge of all the relevant facts. However, special rules apply to some types of property.
Here is an overview of the rules governing the most common types of non-cash contributions:
Donating a Computer
When you donate computer equipment, the organization accepting the donation should provide you with a receipt specifying the equipment you donated and the date of your donation. It is up to you to determine the value of your donated computer. In arriving at a figure, keep in mind that the market value of computers falls quickly. Classified newspaper ads may help in establishing the value of your donated property.
Before donating your computer, erase all personal files and overwrite the data on your hard drive. You want to give away your equipment – not your data.
Giving Away Your Car
In general, if you contribute a car to a charitable organization, you can claim a deduction for the fair market value, which takes into account not only the year, the model, and the mileage of the vehicle, but also the vehicle’s condition and local market variations. As a result, the fair market value of a taxpayer’s car or other vehicle may be lower than the average price listed in used vehicle guides, or “blue books” as they are often called.
Contributing Used Clothing and Household Goods
When donating clothes and household goods, it is your responsibility to assign a fair market value to your donations and obtain a receipt from the recipient organization. For help in valuing used clothing, you might visit a used clothing store or thrift shop. For household goods, you can look in the classified newspaper sections for similar items being sold. Like used computers, the fair market value of used clothes and household goods is far less than the price paid to acquire them.
Donating Art and Collectibles
You may donate artwork, jewelry, and other collectibles as well, but the rules become more complicated. To deduct the fair market value of your donation, the gift must be put to a use related to the organization’s main activity or charitable purpose. For example, if you donate your prized Picasso painting to your local art museum, the painting must be used for study and appreciation within the museum for you to write off the full market value. If, instead, the museum wants to sell the painting to raise funds for a new wing, your deduction would be limited to the painting’s original cost. For this reason, it’s a good idea to ask the charity for a statement outlining its intended use of your gift.
Transferring Ownership of Stocks and Mutual Funds
When you donate stock or mutual fund shares you have held for more than one year, you may deduct the full current market value of the investment on your tax return and avoid paying capital gains tax on the appreciated value. As an example, let’s suppose your portfolio holds shares of stock you bought five years ago for $1,000 that are now worth $5,000. When you donate those shares, you get a deduction of $5,000 and you avoid paying capital gains tax on the $4,000 in appreciated value.
Substantiating Your Donation
In any year in which you make total contributions of property exceeding $500, you’ll need to complete and file IRS Form 8283, Non-cash Charitable Contributions. This is true even if no one single property contribution was greater than $500. If the value of any one piece of property or a group of similar items you contribute (with the exception of publicly traded securities) exceeds $5,000, you need a written appraisal of the property, and both the appraiser and the charity must complete part of Form 8283.
Consult with a Tax Professional
If you’re unsure about the tax implications related to donating property to charitable organizations, before making the donation, especially a substantial one, contact your CPA. A CPA can guide you through the requirements for deducting charitable contributions and assist you in understanding the impact on your taxes.5
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
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