Question: Part of my financial plan calls for giving annual gifts to my favorite charities. Some gifts are in cash, some consist of appreciated stock, and some are precious coins. With tax rates so high, it is more important than ever for me to deduct these gifts on my tax return. What kind of proof of gift do I need to satisfy Uncle Sam?
Answer: In her excellent Herald column on Monday, Senior Advocate and Monterey Trust Management President Liza Horvath enlightened readers with some guidance for making end-of-year gifts. Following her advice and the advice I am about to give you will help you avoid getting in trouble with the IRS. Different kinds of gifts have different rules.
We’ve all been to Goodwill, the Yellow Brick Road, the SPCA thrift shop, St. Vincent de Paul’s, and other benefit shops to either buy or donate household items and clothing. The IRS allows you to deduct the fair market value of what you donate, which they define as “The price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.”
You must get a receipt before you file your return. If the value of the property is over $5,000 ($10,000 for non-publicly traded stock) you also need a qualified appraisal. And if you give multiple items similar in nature (stamps, coins, paintings, non-publicly traded securities, etc.) totaling over $5,000 you also need an appraisal. Take pictures of items that you donate and keep them with your receipts and appraisals, in case you are audited.
When you give articles of clothing or household items, the item must be in good or better condition. Broken televisions sets and old computers and worn out sheets and towels won’t count.
You can still donate your old car or boat, but in general, you can only deduct the amount that the charity sells it for. And you must get the right paperwork from the charity, including IRS Form 1098-C, or a statement containing the same information. If the charity uses your vehicle instead of selling it, you can deduct the fair market value at the time of your contribution. Also, the charity must provide written acknowledgement of what they are using it for along with how long they intend to use it and provide you with a certification that they won’t transfer the vehicle in exchange for money or other property or services before the completion of their use.
When you donate dollars to charities, keep a copy of your cancelled check or credit card statement showing the name of the charity and the amount and get a letter from the charity acknowledging your gift. The letter must include a description and good faith estimate of the fair market value of whatever goods and services you received in return. You can then deduct the difference between the amount of your gift and the value of whatever you received.
You can avoid tax on the appreciation and deduct the market value of donated appreciated stock up to 30% of your adjusted gross income. For publicly trade stocks, you don’t need an appraisal.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.