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Accurately Valuing Charitable Donations for Deduction Purposes

As the filing year draws near its end, many taxpayers in Maryland and across the country are reviewing key documentation and finalizing their charitable giving plans as a means to reduce their overall liability. Itemizing deductions, particularly those related to donations, can be a useful tool for accomplishing this objective, provided that the true value of what is given is accurately assessed. The Baltimore tax attorneys at Rosenberg Martin Greenberg are ready and willing to assist clients in maximizing applicable deductions for this and all future tax years, ensuring full compliance with all state and federal rules.

Ensuring that your donations are truly deductible

Before you decide to make a contribution to a charitable organization, it makes sense to verify that your donation can in fact be deducted for federal tax purposes. Groups to which donations are considered deductible include religious organizations such as churches, temples, and synagogues, nonprofit hospitals and schools, museums, and organizations benefiting war veterans, The Salvation Army, Boy Scouts and Girl Scouts of America, United Way, Goodwill and the like. Though you may have a desire to donate cash or property to political groups, lobbying organizations, labor unions or social clubs, it is important to realize that such donations will not be permitted as the basis for a legitimate tax deduction.  Additionally, the deductible portion of the contribution made to the qualified organization is limited if you received a benefit from goods or services.

Documenting what is given

It is always possible that the IRS will request proof of donations for the deductions were claimed if your exam is picked for examination. It makes good sense to build a record of precisely what has been contributed so that verification, even at a much later date, is never an issue. This can be accomplished by making a detailed list of non-cash items donated including, but not limited to, the recipient organization’s name and address, the date of the contribution and the total amount of deductions claimed for each giving event. It is also critical to request and make certain to receive a receipt from the charity so that an official record can be produced to the taxing authorities if that becomes necessary. Documentation of this type should be retained for at least four years.

Assigning an appropriate value to non-cash contributions

Deductions related to cash contributions are very easy to calculate, but complications can arise with regard to non-cash donations of clothing, household goods and other items. In a general sense, the IRS permits taxpayers to deduct what is known as the fair market value (FMV) of their contributions. This is often quite different from the amount originally paid for donated items, as it involves assessments of age, wear and tear, overall quality and the like. An often-used rule of thumb suggests that fair market value of commonly donated items in good used condition hovers somewhere around 30 percent of the original purchase value. Valuation of other types of contributions, including stocks, jewelry, antiques, vehicles, intellectual property, real estate, business interests and annuity contracts involve more detailed analysis and should always be undertaken in consultation with appraisers or other knowledgeable professionals.

Consequence of incorrect valuation

The IRS may accept the value a taxpayer claims for donated property or it may make its own determination.  Either way if the donated property becomes an issue, the IRS has not one but two tiers of penalties it can assess.  If the IRS determines a taxpayer has overstated the value of donated property, the IRS can assess the more common place 20% penalty, but if the overstatement is large enough, it may assess a 40% penalty.  The thresholds for either penalty can be easily met when more valuable property is involved.

Comprehensive guidance for Maryland taxpayers

At Rosenberg Martin Greenberg, we understand the confusion and uncertainty that can arise when determining allowable credits and deductions on state and federal tax returns. That is why our team of professionals is committed to offering clients individualized assessments of their personal or business tax scenarios, always with an eye toward minimizing liabilities and facilitating full compliance. If you would like to schedule a consultation to discuss your tax planning and preparation needs, we invite you to contact us today.

Resources:

  1. Internal Revenue Service, Publication 526 – Charitable Contributions, https://www.irs.gov/pub/irs-pdf/p526.pdf
  2. Internal Revenue Service, Eight Tips for Deducting Charitable Contributions, https://www.irs.gov/uac/eight-tips-for-deducting-charitable-contributions
  3. Internal Revenue Service, Form 8283 Noncash Charitable Contributions, https://www.irs.gov/pub/irs-pdf/f8283.pdf

Rosenberg Martin Greenberg

25 South Charles Street, 21st Floor MD 21201
Phone: 410-727-6600
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Rosenberg Martin Greenberg

705 Melvin Avenue Annapolis, MD 21401
Phone: 410-727-6600
Map & Directions