Rules for Deducting the Fair Market Value of a Donation to Charity on Taxes
The IRS allows you a tax deduction equal to the value of your donations to charities qualified under Section 501(c)(3) of the Internal Revenue Code. When you donate property, however, you must deduct the property's value in accordance with IRS valuation rules. If you overstate the value of your donation, even accidentally, the IRS might add penalties and interest to your tax bill.
Fair Market Value
Donated property should be valued at "fair market value" for tax purposes. Fair market value equals the price for which you could sell the property on the open market, to a buyer who is knowledgeable about the property and under no coercion to buy it. If you donate high-value property, consider hiring a professional appraiser to provide a written appraisal report in case the IRS audits you. Donations of art and antiques over $5,000 should be supported by a written appraisal. An appraiser affiliated with the charity you donated to is not acceptable to the IRS because of the potential conflict of interest involved.
Special Rules For Real Estate
Valuation of real estate for tax deduction purposes always requires the services of a professional real estate appraiser. The appraisal report must be comprehensive and provide a detailed description of the factors that contributed to the appraised value of the property. The appraiser may choose from several appraisal principles including the sale price for similar properties and the replacement cost.
Special Rules for Vehicles
When determining the fair market value of a vehicle such as an automobile, a boat or a plane, you must take into account its make, model, year, condition, accessories and warranties. You must also take into account the geographical area in which the donation takes place, since sale prices can vary significantly from location to location. The IRS suggests estimating a value with the help of a used vehicle sales guide designed to help sellers price vehicles for sale to private parties. In any case, the value of a vehicle will rarely exceed the dealer retail price for a similar vehicle.
Special Rules For Stocks and Bonds
If a stock or bond is publicly traded, it should be valued at its market price as of the date of valuation. This is normally done by taking the highest sale price and the lowest sale price of an identical stock or bond and averaging them. If the stock or bond is not publicly traded, its value must be appraised based on factors such as (for bonds) the interest yield and the date of maturity and (for stocks) the issuing company's net worth, prospective earnings and dividend-paying capacity. Valuation of stocks and bonds that are not publicly traded can be complex.
If you overstate the value of your donation and thereby underpay your taxes, the IRS might impose penalties. These penalties range from a "failure to pay" penalty of 0.5 percent per month to civil fines that, in the event of fraud, could add as much as 75 percent to the amount you owe. In extreme cases you might be prosecuted for tax evasion, a criminal offense.
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.