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Thanks for coming by! Welcome to the first of what will hopefully become many instructional blogs and corresponding video tutorials (please click the link at the bottom to watch the video tutorial). This blog is about how to earn somewhere around $125.00 per hour tax free! Or, more appropriately titled, how to properly value donated goods, aka, anything that you give to charity and want to claim on your tax return.
I write on this subject particularly because every year it is a recurring problem. Clients come in with one, two, or handfuls of receipts from charity organizations that have a signature at the bottom, maybe a date and a brief description, but there are no dollar values with any of the receipts. This is problematic because clients assume there is a "norm" or a "standard" that can be claimed on their taxes and none exists. The actual amount to put on a tax return is the actual fair market value of the items that are donated. In this instructional blog I am going to tell you, in four easy steps, how to properly value those goods and what documentation you should keep in order to best protect yourself in the case of an audit.
STEP ONE - List
Make a detailed list of all the items that you are donating. You can do this by making a hand-written or typed list, just be sure that you keep the list and put it somewhere that is easily accessible in the future. This list needs to be as detailed as possible. Simply writing "15 pairs of shoes" is inadequate and will be a red flag for the IRS. Instead, describe each and every pair of shoes. What brand are they? What color are they? What size are they? Are they laced? High tops? Wedges? High heels? Is there any sort of decoration or emblem on them? Include as many details as possible and do that for every item that you are donating. Such detail will attract less attention from the IRS because it is less likely someone falsified items in that much detail.
STEP TWO - Photo
Modern technology has made taking photos easy and free, and that is good news for you! While a list is good and the details will substantiate your claim, a photo will be even better evidence and will validate the list. You should take a photo of all items you are donating lined up so the IRS can easily match the items in your list with the items in the photo. But don't stop there! Someone could feasibly pull all of their clothes out of their shelves, take some pictures, and then put the clothes back in their shelves and claim they donated them. To avoid that suspicion, take pictures of the clothes or shoes being put into a bag, pictures of the bag in the car, and pictures of the bag being given to the charity staff member. Have step-by-step proof that those items you described really did go to the charity.
STEP THREE - Value
This is the step where you get to assign the dollar value to each of your donated goods. How do you do that? As before mentioned the actual amount to put on a tax return is the actual fair market value of the items that are donated. The IRS does state in Publication 526 that there is no fixed formula for finding this value and you should use whatever price the buyers pay for used items in consignment or thrift shops. In short - find out how much your used items are being sold elsewhere.
Now you can do this yourself if you really wanted to put in the work to investigate each and every thrift store and collect all the data to generate an average value, but there is a much easier way, three ways actually. The easiest and cheapest way is to go to Goodwill or Salvation Army websites where they will have pages of estimated values for donated goods you can use. While this method is completely free it is also the most limited, as there will be little variety in the options (less than a hundred most likely). Your second option is to buy the book Deduct It! Deduct It! which we do sell through our website. This book is published anew every year and will have hundreds of different options - a much better bet to find the specificity that you might be looking for. The best option, however, is subscription service software such as itsdeductable.com or charitydeductions.com. These do not have the constraints of print so they are going to have thousands of donated items and their values but at the highest price to you as well.
These options will work great for general donated items such as clothes, furniture, electronics, etc. For those rare donated items though, say a rare video set or a collector's item of some sort, your best bet is to go to sites like eBay and search for that similar item to see what other people are paying and get your value from there.
Whichever method you choose, do this for all of your donated items and keep a copy of the estimated price - print out the eBay page, photo copy a page from the book, or print out estimates from the different websites - and file that away with your list and photos so that everything is kept together for when you need it in the future. In the previous example of donating 15 pairs of shoes, maybe some clothes and furniture and any other items around the house, it won't be very difficult to come up with $1,000 worth of donated goods. Not bad for a few extra hours of work.
STEP FOUR - Attach
Attach the receipt! Do not forget the receipt. All of this work will be for nothing if you do not get the signed receipt from the charity organization you give to. Do not forget the receipt! Once you have the receipt, add that to the list, the photos, and the printed out value sheets, and put those all away in a drawer or your special tax folder. Once it comes time to do your taxes you can grab all of those files and easily present them for your return. You will have successfully documented, substantiated, and valued the items you donated to charity.
So let's continue through the example we used previously of donating $1000 worth of items. At an applicable combined federal and state tax rate of 25%, which for some of you might be a little low or high, but more most it will be spot on, you are looking at $250 in your pocket tax free. A couple hours of work for $250, there's your $125 per hour tax free.
Thanks for reading. Please check back with us as more instructional blogs and corresponding video tutorials will be posted throughout the year.