Donating Rules Change

Source: Educated Investor
Edited by: Laura Moore, M.Ed., Principal of ClutterClarity at Home

[I edited this article so people could easily understand important information regarding new donating regulations. Click here for information about where to donate items.]

In 2006, the Pension Protection Act was passed to tighten up rules on charitable contributions and eliminate deductions for worn-out, obsolete, and generally useless items. The IRS certainly does not want to squelch your generosity, but it also doesn't want to pay you for donations that are inaccurate or no longer have value.

Qualified Charity: To receive deductions, the charity you donate to must be "qualified" by the IRS. Visit http://www.irs.gov (Publication 78) to make sure your charity is listed.

Cash: Regardless of the amount, proof of cash donation is required with a canceled check or a receipt with the name of the organization, date and amount of the donation. Rule of thumb: don't give cash unless you get a receipt. When the basket is passed around, drop in a check.

Clothing and Household Items: As of August 17, 2006, only clothing and household items in good used condition or better are eligible for a charitable deduction. Prior to this date, there were no special deduction limitations for clothing and household-item contributions . The value of clothing is now limited to the price paid by buyers of used items in used clothing stores in your town. Ask your charity for its standard "value list" to help you accurately document the value of donated items. The government has yet to state who determines "good used condition or better," yet common sense suggests that a torn or stained garment needs to be tossed, not donated. For more information, read IRS Publication 561, "Determining the Value of Donated Property" on the website listed above.

Over $500 Value, Need Appraisal: You need to get a qualified appraisal for household items or clothing that has a fair market re-sale value of over $500. (Examples: furniture, electronics, appliances, or old mink coat.) Paintings, antiques, art work, jewelry, gems, and collections are not considered household items because they have an artistic as well as a utilitarian value. However, your item may be considered a home furnishing, not art work. Ask your tax professional for guidance.

Donating Vehicles: Charities advertise for used cars, boats (even planes) donations, yet they often receive only a fraction of the vehicle's fair market value (Kelly Blue Book) or actual sale price of the car because they are contracted with a for-profit business that advertise, pick up, and sell the donated cars. So you are not donating as much value as you think. Therefore, the IRS requires more paperwork (1098C form) to show the gross proceeds from the sale of the vehicle, which you have to attach to your tax return. It may be still worth it to donate the vehicle instead of sell it and write a check if the charity is able to make significant use of the vehicle before they sell it. For example:

The vehicle is still sufficiently road-worthy for at least a year or 10,000 miles and is used by the qualified charity to further its regularly conducted activities, like delivering meals or for vehicle repair training.
The charity plans to make "major repairs that increase the vehicle's value," and then sell it.

Kelly Blue Book records fair market value (same make, model and year, sold in the same area, in the same condition as the vehicle when you gave it away). The IRS is unclear as to what happens if the charity accepts the vehicle, intending to make significant intervening use of it, but doesn't because for example, another car is donated that better suits its needs. It may be better to sell the old vehicle, and write a check to charity.

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Donating Rules Change