Some gifts to charity may no longer be deductible

Personal Finance

December 17, 2006|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

Goodwill Industries' drop-off site in Timonium is one of the nonprofit's busiest in the country. On a recent Tuesday, cars on average dropped off a donation every two or three minutes. And that was a slow day.

Most donors grabbed a receipt for tax purposes. But many were unaware Congress now requires that donated clothes and household items be in good used condition to qualify for a tax deduction.

That means donors can no longer take deductions for broken appliances, busted toys, used mattresses, well-worn shoes, electronics on their last legs or thread-bare underwear.

"It's reasonable," Barbara Ebaugh of Hampstead said of the new standard as she unloaded her donations. "I don't think you should donate trash. It should be usable."

Congress has been tightening the rules for charitable donations to stem abuses. Some clearly target the wealthy, such as banning deductions for big-game hunts. But some changes affect donors of more modest means.

Last year, for instance, deductions for donated vehicles became less generous in many cases. This year, clothing and household items must meet a quality threshold or might require an appraisal.

Congress also gave the Treasury Department the go-ahead to come up with rules for denying deductions for items of little value -- namely, used socks and underwear.

Next year, even the smallest cash donations -- $5 to a co-worker's charity walkathon -- will require documentation if you want to deduct it.

Here are some of the details, starting with vehicle donations:

After hearing tales of inflated deductions for donated clunkers, Congress clamped down.

Now you can deduct the fair market value of a car if it is $500 or less. You can determine the value through used-car guides, such as Kelley Blue Book, or by looking at the price of similar used cars in classified ads.

If the value is higher than $500, your deduction is limited to the amount that the charity actually receives for a vehicle immediately sold. Most charities quickly sell vehicles at auction, then mail receipts with the sales prices to donors.

There are exceptions.

You can deduct the fair market value of a vehicle that exceeds $500 if the charity uses the car for its own operations or makes material improvements to the car before passing it onto others, experts said.

And you can deduct the fair market value if the car is given or sold to a low-income individual for a price well below fair market, experts said.

Martin Schwartz, president of Vehicles for Change in Elkridge, said his group falls into this last category. It does small repairs on donated vehicles and sells them with a six-month warranty for about $1,000 to low-income families.

The nonprofit can usually tell quickly by the car's year and mileage whether it can be used for the program, Schwartz said.

About one out of three donations qualify. Others are in such poor shape that they are sold at auction, and the donors must deduct the auction price, he said.

Jim Hartman, vice president of vehicle donations at Volunteers of America, said his group mostly sells donated vehicles at auction.

But it works hard to get the best price possible, sometimes selling unique cars on eBay, he said.

Through the online auctioneer, Volunteers received $6,900 for an old Rolls-Royce that no longer ran and $14,000 for a 1996 convertible Mercedes, he said.

Clothes, home items

Goodwill's Timonium drop-off site occasionally runs across unacceptable items, such as pillows, cushions and plastic hangars.

"People know what we do and don't accept," said supervisor Myron Boykins.

The problem occurs when the site is closed. Workers arrive in the morning to find old couches, box springs and broken appliances that have been dumped.

"They drop it off early in the morning so we don't see it," said Goodwill associate Byron Lindsay.

Goodwill Industries of the Chesapeake, which operates about two dozen drop-off sites in Timonium and elsewhere, spends about $500,000 a year to have trash hauled away.

"We have to use revenue that we would otherwise use to help people," said Lisa Rusyniak, chief operating officer.

As of August, donated clothes and household items must be in "good used condition or better" to qualify for a deduction.

An item doesn't have to be in good shape, though, if it's worth more than $500 and you have an appraisal on it.

These new standards could be a blessing, said Melissa Temme, public relations director for the Salvation Army National Headquarters in Virginia.

"It helps to educate the public about what we can and can't use," she said.

Cash gifts

For years, you needed documentation for cash donations of $250 or more. Beginning in January, you will need paperwork to back up even small cash gifts if you want to deduct them.

Verification can be a letter from the charity acknowledging the gift, canceled checks or bank and credit card statements, according to the IRS.

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