Many taxpayers will drop off clothing and other household items at charities such as Goodwill and the Salvation Army before the year ends, aiming to clean out their closets while also getting a tax break.
But because many charities don’t assess the value of those donated sweaters and pants when they hand you a receipt, it’s often up to taxpayers to figure out how much to deduct on their taxes — and that can be a gray area, experts say.
“People have a tendency to overvalue non-cash donations, especially for things like donated clothes,” says Eric Bronnenkant, head of tax at financial services firm Betterment. “They think about what they paid for it — maybe it was $60 for a sweater. But that same piece of clothing may not be worth anywhere near as much now.”
Assigning generous values to noncash donations may also be more tempting for some taxpayers under the tax reform that went into effect last year. Because the standard deduction almost doubled for single and married taxpayers — reaching $12,200 and $24,400 in 2019, respectively — donating household goods could help push some taxpayers across that threshold, allowing them to itemize and take even larger deductions.
But tax experts say it’s important to be realistic in assessing the value of non-cash donations. It’s also important to document those donations, especially for valuable items like cars or antiques.
Smart shopping:3 of the best financial decisions you can make right now
Do you overspend at the holidays?:Your smartphone may be to blame
“It is very common for taxpayers to donate clothing or household items without properly documenting the donation,” says Adele Kilgus, a CPA at accounting firm Drucker & Scaccetti. “This puts them at risk of having the deduction disallowed if ever challenged by the IRS.”
Here are 5 tips about noncash donations from the tax experts.
Is your stuff in good condition?
First, the IRS says clothing and other household items should be in “good used condition or better” in order to take a deduction. In other words, the items should be in good enough condition to be used or worn by others.
If you donate an item worth at least $500 that isn’t in good condition — such as an antique that may be damaged but remains valuable — the IRS says you’ll need an appraisal to document its value.
Document, document, document
As Kilgus notes, you’ll want to keep records of your donations in case the IRS comes calling. Donations of less than $250 should be documented with the name of the charity, the date and location of the contribution, and a detailed description of the donated property, she adds.
“If you’re dropping a bag of clothes into an unattended clothing drop box in a parking lot somewhere, the IRS understands that it’s impractical that you would get a receipt,” she notes.
But if your donation is worth more than $250, make sure to get a receipt or a letter from the charity, which Kilgus says should also specify that you didn’t receive any goods or services in exchange for the donation.
The $500 threshold
Once the value of the donations reaches $500 — including several smaller donations to the same charity that add up to $500 — you’ll need to report the donation on IRS Form 8283. The form asks for details such as when you first bought the donated item and what you paid for it.
“This is in addition to the requirement for a receipt or other written acknowledgement from the charity,” Kilgus adds.
When you’ll need an appraisal
Noncash donations that are worth more than $5,000 require a qualified appraisal, according to the IRS. In this case, you’ll need to hire an appraiser who has been trained and earned qualifications in their field.
“You would typically see appraisals for items like paintings or antiques,” Kilgus notes. “I would also recommend an appraisal if the items you are donating are clothing or household goods that you believe are worth more because they are old or unique, even if their value is under the $5,000 threshold.”
Getting to fair market value
Lastly, do some research when you assign a value to a holiday sweater that’s heading for a donation bin. Goodwill and the Salvation Army will provide a value range for household items, such as $4 to $9 for a blouse.
To determine an exact value, take a look at what similar articles of used clothing are selling for online or in thrift shops to determine a fair market value, Betterment’s Bronnenkant says.
Black Friday store ads 2019:Get a jump on holiday shopping plans with early look at ads
“You should show you went through the process to determine the value,” he adds. “If you just made an off-the-cuff estimate of $500 or whatever, that might be challenged.”