For years, the IRS has been concerned that many taxpayers often exaggerate their deductions for non-cash contributions. To eliminate this widespread loophole, two recent tax bills include provisions that limit people's ability to apply for deductions when donating vehicles, clothing and household goods. In this article, we'll show you how these new rules mean smaller returns when you return. (For more information on tax deductions, see the traditional IRA deduction limits, 10 tax preparation steps, and year-end tax tips for saving money.)
In October 2004, the Employment Creation Act of the United States amended the regulations for donating vehicles. As of January 1, 2005, the amount of donated vehicles you can deduct is usually limited to the price of vehicles sold by charities, not the value of their blue books. Within 30 days after the sale of your vehicle, charities need to provide you with written confirmation, including the total sales revenue.
However, there are three exceptions to this rule. If charities use cars for their own purposes, make major repairs or improvements to increase their value, or donate or sell them at a discount to individuals in need, the rules before 2005 apply, and you can deduct them according to the fair market value of cars. Just make sure that charities include a statement detailing their intentions in their confirmation.
If you plan to apply for a deduction of more than $500 for donated vehicles, make sure that you attach a confirmation from a charity to your tax return. Many charities will incorporate all this information into the new IRS Form 1098-C. Failure to attach a confirmation or form 1098-C to the tax return may result in your deduction being rejected. (For related readings, see Deducting Your Donation.)
The Pension Protection Act 2006, signed on 17 August 2006 for clothing and household goods, further limits the amount of deductions you can apply for for non-cash contributions. In addition to a radical change in pension plan rules, the tax law also includes a restriction on charitable deductions, that is, you can apply for deductions for your clothes and household goods. Under the new rules, you can only ask for the deduction of donated items in good condition or better.
As usual, before handing over your clothes and household items to charities, don't forget to list the items you donated, including the status of each item and the general fair market value, and file the list with other tax documents. Keep in mind that unless a product is brand new or in good condition, its value may not exceed a quarter to a third of its original cost.
To better comply with this new standard, consider taking photos of donated items and binding them to your list. If you have been audited, the IRS will probably refuse to accept all deductions required unless you can confirm that the donated items are in good or better condition. (Audited, please continue to check after the IRS audit.)
To apply for the deduction of donations over $500, you need to fill out form 8283 and attach it to the federal income tax return. If you want to apply for a deduction of more than $5,000, you usually need to attach a written assessment to your tax return. For more information on non-cash contributions, see IRS Publication 526: Charitable Donations.
What happens if you exaggerate your non-cash contribution? The Pension Protection Act of 2006 increases the fine you may pay. If you overestimate the amount of charitable donations by at least 150%, the IRS is expected to impose a fine of 20% for underreporting; if you overestimate the amount of deductions by 200% or more, the IRS is expected to impose a fine of 40% for underreporting.
Compliance with the new standard combined with the new standard has brought many problems to taxpayers. The process of determining whether items are in good or better condition will be different from that of vehicles with a secondary market, allowing charities to easily determine the value of donated vehicles, and developing standardized systems to determine the status and value of donated clothing and household items, which will significantly improve Hal Enging.