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Regulation and Compliance > Federal Regulation > IRS

Prepare now for next year’s non-cash charitable contributions

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Many of your clients may be writing out checks to the Internal Revenue Service this week and wishing they had come up with a few more deductions sometime in 2014. One relatively painless way to reduce both income tax and the size of an estate is to make charitable contributions of non-cash goods the client no longer needs, especially valuable items like jewelry, cars, even real estate.

But document the value of donated items to the standards of the IRS can be cumbersome and exacting. The charity needs to be heavily involved as well, so it helps if the client finds a recipient with whom he or she has an existing relationship. It can also be difficult to find a charity that knows what to do with a valuable but odd gift, such as a private plane.

The IRS’ rules are different depending on the value of the donated assets. Property donations over $5,000 require a written and signed acknowledgment from the charity. The acknowledgment must describe whether the charity provided anything of value in exchange for the gift, and the value of those goods or services.

They also require an appraisal of the property’s value from a qualified appraiser. The appraisal causes a headache for many taxpayers because of the hoops one must jump through: The appraisal must be conducted within 60 days of the date of the donation; and the client must use an appraiser from an IRS-approved list.

Also, appraisals can be expensive (the cost can’t be considered part of the donation). And the IRS forbids the receiving organization from paying for it in any way — the donor must foot the bill.

A few items do not require an appraisal, such as the obvious exception of stocks or mutual funds. In addition, an appraisal is irrelevant for property the donor has owned for less than a year; in this case, the deduction is limited to the property’s original cost.

Special restrictions apply to donations of vehicles, planes, and boats. In these cases, the donor’s deduction is limited to the gross proceeds from its sale once the charity disposes of it, rather than an estimate of its value.

The good news is this doesn’t require an appraisal. The bad news is the transaction isn’t complete and the deduction can’t be made until the charity sells the vehicle.

Note that if the client is making gifts totaling more than $5,000 in value to a single charity at one time, they will be treated as a single gift worth $5,000. That means each item would need to be appraised.

Non-cash donations of less than $5,000 are treated differently. Most significantly, the appraisal is not required. But the client must have “reliable written records” for each item donated, including:

  • how and when the property was acquired

  • a detailed description of the property

  • the cost or other basis of the property

  • the current fair market value

  • how that fair market value was determined

There also must be written documentation from the charity, acknowledging the receipt of the item.

Trusts can also make non-cash contributions and can get a tax deduction for them. Although the rules are much simpler, the strategy may not be worth the effort. The deduction is usually just the purchase price, no matter what the current value of the item. And of course, the non-cash asset must have been distributed to the trust.

But making non-cash contributions can be beneficial while exacting little financial toll on the client. Inherited jewelry or older vehicles with limited practical value can be turned into a valuable tax tactic, when they otherwise might have just sat around collecting dust.

In many cases, the only real cost involved is the time spent in making the donation itself — which is why the time to get started on this strategy is now.