Determining Fair Market Value
For years, I accumulated more than a dozen tupperware tubs full of children’s clothing, old toys, obsolete baby gear, and household paraphrenalia in my home’s attic. I knew I wanted to donate a lot of it to charity and use my contribution as a tax deduction, but I was completely paralyzed by how to determine fair market value for all the goods. So, there they sat, gathering dust in my attic while I hemmed and hawed about exactly how to make it happen.
Why Charitable Contributions Matter
Back when I was a W-2 employee, I didn’t obsess about tax deductions and other write offs. After all, I’d used my W-4 to control my biweekly tax withholdings, and I never hd to worry about whether or not I’d receive a tax bill come April 15th. When I switched to freelance work, however, all that changed. Now, I prepare estimated quarterly income taxes in order to gauge my overall tax status. I write off everything from my Internet usage to the portion of my mortgage dedicated to my home office. I also strategically time my charitable contributions to help decrease my taxable income if possible.
Why Fair Market Value Matters
If you’re making relatively small contributions – less than $250 at a time – then you won’t have to send in anything special when you mail your tax returns to the IRS; you’ll only have to fill out your contribution in the designated space on your Schedule A. If you donate more – between $250 and $500 at a time – then you’ll need to obtain a receipt of donation from the charitable organization to verify your contribution.
It’s once you top that $500 mark in a single transaction that you’ll have to take additional steps beyond filling out your Schedule A form. At that point, you’ll need to fill out Form 8283; for some high-value donations, you may even be required to include a notarized appraisal of your goods, to ensure that you’re not trying to fleece the government.
Fair Market Value: Who Bears The Burden of Proof
In a criminal court case, it’s the prosecution that bears the burden of proof in order to obtain a conviction, not the defense. The same general idea holds true when it comes to making noncash charitable contributions; the donor (ie, the prosecution) holds the burden of proof for determining a fair market value for the goods they’re contributing, not the charity.
However, many charitable organizations – like Goodwill and The Salvation Army – know just how confusing it can be for average Joes (and Janes, like me) to determine an approximate value for their goods. That’s why they often post fair market value calculators, spreadsheets, or checklists on their websites to help folks like you and me assign a reasonable value to our contributions.
Not All Fair Market Value Calculators Are Created Equal
Just because you find a fair market value calculator on the web doesn’t mean it’ll work for you. Here are a couple of things to ask yourself when assessing fair market value:
- Where is the charity located? If you live in an area with a relatively low cost of living, you’ll want to look for a fair market value calculator from a charity that is in a similar location: likewise if you live in a high cost of living area. The reason? The value of a pair of women’s slacks can vary dramatically from somewhere like Indianapolis to San Francisco.
- How recent is the calculator? Be sure to check the date on any fair market calculator you use. As I was assigning a dollar amount to my donations, I came across a site that suggested I price infant onesies at $3.89 each – even I knew that number was too high. I scrolled to the bottom of the web page, and saw that the calculator hadn’t been revised since before the economic recession, probably making it too out of date to be reliable.
- What shape are your goods in? Most fair market value tools give you a range, not an exact number. It’s up to you to determine if the set of bath towels you plan to donate are worth top dollar, or a little less.
Of course, only a small percentage of American taxpayers are going to be audited, but that doesn’t – and shouldn’t – give you license to fudge the numbers when it comes to fair market value. Just as you wouldn’t cheat on your taxes, don’t cheat on your assessment of fair market value.
What To Do With Your Fair Market Value
You don’t need to hand an itemized receipt with your fair market values over to the charity along with your donation; the IRS is the only one that wants or needs it – and they don’t need it in every case. Keep a copy of your estimate, including line by line details on what you donated (men’s shirts, women’s dresses, table settings, books, etc.), as well as a fair market value for each. In some cases, you may be able to group like items; in other cases, each item in a specific category may be worth a slightly different amount. The more details, the better: it’s unlikely you’ll be audited, but if you are, you’ll want as much evidence to support the validity of your donation as possible.
In most cases, you don’t need to send a copy of your receipt in to the IRS; you’ll only need to provide it if you are audited. For some mid-range noncash donations, however, you may also need to provide a signed and dated receipt from the charity.