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Tax deductions for clothing donations

 

donationAs the end of yet another year draws to a close, the time has dwindled down to a precious few months for making retirement plan contributions and charitable donations in order to receive the benefits on your 2006 income tax returns. But it's not too late to take advantage of one of the most often overlooked and under-valued deductions available to taxpayers—non-monetary charitable contributions. Making donations of items such as used furniture and clothing is a great way to clear some of the clutter from your home and help a worthy cause while generating a nice deduction for your itemized income tax return.

Intuit, the company, which produces one of the leading tax preparation software programs, estimates that over 20 million Americans overpay taxes every year by underestimating the value of their charitable donations. According to the IRS, you are able to claim the "fair market value" (FMV) of the item on the date the contribution was made. As defined by the IRS, "Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. If you put a restriction on the use of property you donate, the FMV must reflect that restriction."

The main reason that this type of deduction has been underutilized for so many years is due to the complexity and difficulty of researching and compiling the data necessary for establishing the FMV of items. However, the creation and proliferation of online auction services such as eBay® has led to the accumulation of vast amounts of transaction data regarding used items—which is perfect for meeting the IRS requirements for determining FMV of specific goods.

computerTo simplify the process even further, one leading tax preparation software developer has seized the opportunity and developed a software program (for purchase independently or as part of their tax preparation software package). The program, called ItsDeductible—the Blue Book for Donated Items, references data compiled from extensive research of resale outlets and market data from eBay®. You simply choose the category and condition of each item you have donated (i.e., 1 pair men's dress slacks—good condition) and the program references compiled data and generates a FMV for the item. The also program keeps a running tally of all your donated items and the cumulative FMV for the total of your donations. Not only does the program assign accurate values in compliance with IRS guidelines, it also allows you to track your charitable donations as they are made throughout the year, automatically prepares IRS Tax Form 8283 (required for noncash charitable deductions when the value is over $500.00), and also prints the necessary reports and receipts to substantiate your deductions.

When making noncash donations, you are still required to obtain a receipt for the items from the charitable organization and the IRS also recommends taking photographs of the items and retaining them with your tax records for that year as proof and documentation that the item existed.

In an age where raising a family is more costly than ever, there's no better time than the present to start recapturing money to which you are entitled from the government. So clean out those closets (if you haven't touched it or worn it in a year, chances are you won't miss it!), choose your charity, get your receipt, and take advantage of that deduction for 2006!

The Internal Revenue Service publishes a list of its approved charitable organizations, Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986. This is a list of organizations eligible to receive tax-deductible charitable contributions. The online version at www.irs.gov/charities (and choose the "Search for Charities" link) is offered to help you conduct a more efficient search of these organizations.

As always, consult with your financial planner or tax preparer to verify that the organization to which you are donating meets the IRS standards, and that your chosen method of valuation is acceptable.

Sources:
Department of the Treasury—www.irs.gov
Intuit—www.turbotax.intuit.com

Articles are provided for the general interest of our readers. Gerber Life Insurance is not responsible for any content and recommends that you consult the appropriate professional with any questions or concerns you may have concerning any financial or health related issues.



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