As the year ends, many clients consider donating clothing and household items to give back while potentially maximizing charitable tax deductions. These items must be in good condition (or working order for electronics and appliances). I recommend that clients take pictures (or videos to show an old TV or appliance still works). Recent cases, like the United States Tax Court case involving Duncan Bass (No. 833-20 (U.S.T.C. Mar. 27, 2023)), emphasize the importance of understanding and complying with IRS rules for these property contributions.
Mr. Bass made an impressive 172 trips to Goodwill and the Salvation Army, strategically keeping each donation receipt below the $250 limit. However, he neglected to consider the rules around aggregating similar items and the appraisal requirements.
The $250 Rule
Before addressing aggregation and appraisal, it’s essential to understand the $250 rule. Suppose you make a single charitable contribution of $250 or more. In that case, IRS regulations require that you obtain a “contemporaneous written acknowledgment” from the charitable organization before you file your return or before the due date (including an extension – whichever is earlier – to substantiate your deduction. This acknowledgment must:
- Confirm the cash amount or describe any property donated.
- State whether the charity provided any goods or services in exchange for the donation. If so, it must include a description and an estimate of the value of those goods or services.
- Mention if the only benefit you received was an intangible religious benefit, if applicable.
For multiple smaller donations to the same charity throughout the year, an acknowledgment is necessary only if any single gift meets or exceeds the $250 threshold.
Assigning Fair Market Value
Determining an item’s fair market value can be one of the most challenging aspects. Fair market value refers not to what you originally paid for it but to its current worth. Resources such as the Salvation Army and Goodwill provide value guides on their respective websites to assist with these estimates.
Contributions Exceeding $5,000
If you claim a deduction of more than $5,000 for a non-cash charitable donation—whether a single item or a group of similar items—a qualified appraisal is required, and it must be attached to your tax return.
Key Consideration: Aggregation of Similar Items
One crucial point is that a “group of similar items” may necessitate an appraisal, as Mr. Bass discovered. His 172 clothing donations totaled $13,852 and $11,594 in the two years under review—well above the $5,000 appraisal threshold for a grouped item category.