The tax benefits of turning trash into treasure

Frank Mokosak for the Des Moines Register writes: If you have used clothing, household goods, or a car that you no longer need, you may be able to do good by contributing the property to charity while obtaining an income tax deduction for your contribution. Subject to certain limitations, the amount of your charitable contribution is usually the fair market value (the price that property would sell for on the open market) of the property at the time of the contribution.

Used clothing and household goodsYou generally cannot take a deduction for donations of used clothing or household goods unless the property is in good condition or better. However, you can take a deduction for these items even if they’re not in good condition, if the claimed value is greater than $500 and you include a qualified appraisal with your tax return.

A good indication of the value of used clothing is the price that a buyer would pay in used clothing stores. Used household goods may have little or no value because of their condition, or because they are out of style or no longer useful.

Used carsThe value of a used car can usually be determined using a used car-pricing guide for a private party sale. The price listed should be for a car of the same make, model, and year, and with similar options and accessories. Adjustments may be needed for wear and tear, and mileage.

However, your deduction for a donated car may be limited to the amount for which the charity then sells the car. This rule applies if the claimed value for the car is over $500, unless: 1) the charity makes a significant intervening use of or material improvement to the car before selling it; or 2) the charity gives the vehicle, or sells it for well below fair market value, to a needy individual to further the organization’s charitable purpose.

You must attach Copy B Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, (or other statement from the charity containing the same information) to your tax return. Form 1098-C shows the gross proceeds the charity received if the charity sold the car and whether either of the two exceptions for cars valued at more than $500 applies.

If the charity sells the car for $500 or less (and neither of the two exceptions applies), your deduction is generally limited to the lesser of $500 or the car’s fair market value on the date of the contribution.

Other requirements
A receipt is generally required from the charity for all noncash gifts

A written statement is required from the charity acknowledging all noncash gifts above $250

An appraisal is generally needed when you donate an item or group of items of property if the claimed value is more than $5,000

Charitable contribution deductions are generally limited to 50% of your adjusted gross income (AGI) or 30% or 20% of AGI depending on the type of charity and the property donated.

Frank Mokosak is a Principal and Investor Coach at Mokosak Advisory Group.