Why It's Great to Give as Well as to Receive
Donations are financial investments you can feel good about.
This event will feature furniture and different kinds of household items in good condition that are priced to sell.
Your donations, pre-marked with prices, will be welcomed by volunteers as early as 7 a.m. Large furniture donations don't need to be transported to the location, just e-mail a picture to email@example.com and it will be displayed at the sale for anyone who is interested.
Donating items has many benefits. Clothing that no longer fits, appliances and sporting equipment that are no longer used, and cars that are being replaced may be of great benefit to someone else.
The tax law rewards donations of these items to charities that can put them to continued good use by permitting a tax deduction if certain conditions are met.
You can deduct the value of the items you donate. A deduction of these items generally is subject to the 50 percent of adjusted gross income limit. This means that donations of these items are included along with your cash contributions to determine your annual limit. The items must be donated to a qualified charity.
You cannot claim a deduction if you donate items directly to an individual, no matter how much in need that person may be. An example of this would be, if a fire destroys a neighbor's house and you provide your neighbor with clothing and other items, you cannot claim a charitable contribution deduction for your generosity.
Special substantiation rules apply to donations of motor vehicles, boats and airplanes valued at over $500. You must obtain a written acknowledgement, Form 1098-C, for contributions of motor vehicles, boats and airplanes, either within 30 days of the contribution or the date the organization sells the vehicle without using it in any significant way.
If the organization sells the vehicle without using it in a significant way in its charitable activities or making any improvements to the vehicle, your donation is limited to the sale proceeds that the organization receives from the sale. Information about the sale is provided by the IRS.
Taxpayers can have their cake and eat it, too, by recouping their investments in property while obtaining tax deductions by making what's called "bargain sales" of property to charity.
It's a bargain because the charity is paying only a portion of the property's actual value, typically the owner's original cost of the property. It's a sale because the donor is receiving payment for the transaction and not donating the total value of the property.
Even so, a partial tax deduction is permitted under certain conditions. In effect, the donation is viewed as two transactions: part sale and part gift.
You figure your gain on the sale by allocating the basis between the sale and the gift part. For example, if you sell property to your favorite charity for what you paid for it ($12,000). At the time of the donation it is worth $20,000. First you divide $12,000 by $20,000, which is 60%. Then apply 60% to the adjusted basis of $12,000, which is $7,200, the basis allocated to the sale.
Your gain is $4,800, the difference between your sale proceeds of $12,000 and the basis of $7,200. By making the donation, you have obtained a charitable contribution deduction of $8,000 (the appreciation of the property), while recouping your initial investment, so you are out of pocket nothing.
Had you sold the property to someone other than a charity, you would have paid capital gains tax on the gain of $8,000 ($20,000-$12,000), or $1,200 at a 15% capital gain rate.
Donating property through a bargain sale saves you the time and expense of selling it to a third party. You raise the funds from the donation while keeping your initial investment.