14 Mar Red flags for valuing donated property

Q. I’ve donated a lot of clothing and house stuff to charities this year. What’s the best way to value them for deductions, and what red flags should I watch for? — Deduction-nervous

A. Donating non-cash items can help a charity while helping you reduce your tax burden — assuming you itemize your deductions.

Before we get to the red flags, know that your deductions must exceed the standard deduction to benefit from charitable donations.

For 2016, the standard deductions is $12,600 if you’re Married Filing Jointly, $9,300 for Head of Household and $6,300 for Single or Married Filing Separately, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

To figure how much an item is worth for purposes of arriving at the amount to claim as a tax deduction, you must first determine its Fair Market Value (FMV) on the date you contributed it to the charity, Papetti said.

“As per IRS Publication 561, FMV is defined as the price that property would sell for on the open market between a willing buyer and willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts about the property,” Papetti said.

He notes that if you put a restriction on the use of the property you donate, the FMV must consider that restriction.

Publication 561 is helpful in providing guidance on what to consider when valuing donated property as it provides various examples, one of which is donating used clothing to the Salvation Army.

“They state the FMV should reflect the age, condition, style and use of the clothing and that it is usually worth far less than what the taxpayer paid,” he said.

Papetti also cites another example in the publication: the donation of used furniture. The publication states a formula percentage of the original purchase price is not an accurate method to value the furniture. Instead, consideration should be given to the style, condition as well as if it is an antique. In that case, it would be more valuable.

“Publication 561 also provides a useful chart to help determine FMV as well as a summary of many types of property such as Used Clothing, Jewelry, and Household Goods so checking with this publication may put you on the right path to determine FMV,” Papetti said.

If the value of the donated property is more than $5,000, you must also submit Form 8283, and you must attach a separate Form 8283 for each item contributed that is valued at more than $5,000.

There are penalties if you overstate the value of a donated item: There’s a 20 percent penalty if the item is valued at 200 percent or more than the correct value and you underpaid your tax by more than $5,000, and a 40 percent penalty if the item is valued at 200 percent or more than the correct value and you underpaid your tax by more than $5,000.

“Reasonable judgment should be used when valuing non-cash donations and proper support should be obtained such as an appraisal when donating an item you value more than $5,000,” Papetti said.

Good luck with your deductions!

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This story was first posted in March 2016.