by Roger Russell
Tax practitioners can save their clients time and embarrassment - and probably some money - by advising them to forgo the traditional garage or yard sale and donate their used items to charity.
"For taxpayers, donating clothes and other household goods to charity is not only simpler, it can generate as much or more cash than the typical garage sale chalks up," said Bill Reid, vice president of sales of Omaha, Neb.-based Income Dynamics Inc., the provider of a workbook and tracking software to simplify a taxpayer’s job in substantiating charitable deductions.
The charitable deduction for property donated to a charity must be substantiated on Form 8283 if the total value of contributed goods exceeds $500. "A lot of people guess at the value, and come up with three or four hundred dollars," said Lincoln, Neb.-based CPA William Lewis. "Clients are leaving a lot of money on the table because they don’t have a convenient way to summarize or a proper way to value their donations."
"This is one of the most overlooked deductions," agreed William Marino, a Long Island, N.Y.-based CPA. "It’s troublesome for most people because it’s hard to establish a value. Often, people just put down eight bags of used clothing’ and come up with their own value, and it’s not signed by the charitable organization. To get the proper substantiation, they need to itemize and have the charitable organization sign the receipt."
To solve the valuation problem and allow taxpayers to receive the full value of their non-cash charitable donations, Income Dynamics markets ItsDeductible, which is available in either workbook or CD-ROM. Income Dynamics uses a patented technology to capture millions of Internet transactions, and combines these figures with a nationwide network of manual data collection from the Salvation Army, Goodwill and consignment stores. These figures are compiled to give average fair-market value to thousands of commonly donated items.
The Internal Revenue Service specifies that for used clothing, a taxpayer should claim as the value the price that buyers of used items actually pay in used clothing stores, such as consignment or thrift shops. "I’ve never had a problem with the IRS using these figures," said Overland Park, Kan.-based CPA Peter Newman. "I tell my clients to use the program, and they thank me for it."
ItsDeductible sells for under $30 for a single user. "I buy it in bulk and give it to my clients," said Lewis. "My focus is to try to add value and separate myself from other CPAs. If my clients are happy that will build up my business and have more loyalty from my existing clients."
Without using ItsDeductible, Lewis said, most clients will take a guess on a figure less than $500 so they don’t have to substantiate it. "If they use the workbook or the software, they might come up with a figure, for example, of $2,000, which can translate into a $600 in real tax savings," he said.
Because the values given by ItsDeductible are formulated in the way that the IRS specifies, there usually is no issue. "Over the past 13 years, to our knowledge, there have been 12 inquiries where a return was audited for other purposes. We’ve satisfied the IRS by providing the methodology we use, and that has satisfied them in every case," said Reid.
"As long as you can show the IRS how the figures were arrived at, they’re satisfied," noted Lewis. "It’s people who guess at values that the IRS is not happy with."
The workbook lists prices for men’s and women’s clothing, designer clothing, jewelry, baby supplies, electrical appliances, furniture, garden tools, linens, sporting goods, exercise equipment, games and toys. According to the data, a woman’s turtleneck in good condition is worth $20, one in average condition is worth $11 and one in poor condition is worth $8. Rug shampooers go for $39 in good condition, $17 in fair condition and $3 in poor condition.
Last year, H&R Block’s Tax Cut online software for consumers provided a link to ItsDeductible. "We’re currently exploring the continuation of our relationship with Block and other possible partners," said Reid.
Income Dynamics provides an audit protection warranty to each user of the program. "We stand behind the valuations - we’ll provide the documentation necessary to show where the figures came from, and if there are fines and penalties we’ll pay them," said Reid. "It’s a peace-of-mind issue for taxpayers. The typical response is, ÔThis is a great idea, but will it raise a red flag with the IRS?’ We’ve communicated with the IRS during inquiries, and never had a fine or penalty assessed."
Reid estimates that clients average a savings of $500 on taxes by using the values in ItsDeductible. "It’s really a win-win proposition," he said. "It saves the taxpayer money, and is a client retention and acquisition tool for the CPA, as well as generating additional income from preparing the Form 8283."
