One of the primary reasons to make a donation to a charity is to earn a tax deduction. While many people donate their cars, services and other items to charity out of the good of their own heart, the financial incentives cannot be ignored. When you make a donation that’s not in cash, you’ll need to figure out the fair market value. This will allow you to take the proper deduction on your income taxes, protecting both you and the charity from any allegations of misuse. How do you figure out what the fair market value happens to be? The process can either be very simple or slightly difficult depending on the item in question.
Why figuring out the fair market value is important
When you file your taxes, you may be in a position to take itemized deductions. If this is you, then you’ll be able to deduct the value of your donations to qualifying charities. Getting the amount right can allow you to extract maximum value from your philanthropy. It can also ensure that the IRS does not scrutinize your return too closely.
If you overestimate the fair market value of your donations, then the IRS may take issue not only with that part of your return, but also with the rest of your tax situation. This is one of the quickest ways to end up in an audit, which can cause major headaches. The first place to start when figuring out fair market value is with the charity itself.
In-kind donation forms
Many charities will provide a form that documents the value of services you have provided or items you have donated. If you donate a car, for instance, then the charity can provide evidence of the market value of the vehicle at the time of donation. Some business owners will donate their expertise, including things like consulting, editing or other services. The charity will likely provide some documentation that can be used for tax purposes when you make this sort of donation.
No single formula to use when valuing donated items
The IRS provides some guidance to people who want to make use of a deduction from donated items. Generally speaking, this guidance informs taxpayers that there is no single, simple method to figure out what a donation was worth. The goal is to determine what the item would sell for on the open market if you happened to sell it there. This is fairly easy with some items, such as boats and cars, because the book value of such an item can be reliably located. For other items, including clothing, it becomes more difficult.
One guideline suggested by experts is to discount off of the original price of the item. To be on the safe side, individuals should discount as much as 70% off of the original price to come up with the market value of used goods. For new goods, the original sale price may be a good option for determining fair market value.