If you itemize deductions on your tax return, you may write off contributions of money equivalents or property that you made to qualified charitable organizations during 2022. In fact, the tax rules are especially favorable if you donated property that has appreciated in value over the years. But you must toe the line when it comes to the strict substantiation rules imposed by the IRS.
For instance, you must obtain a qualified appraisal for a deduction of donated property with a value in excess of $5,000. Without the appraisal, the IRS may come knocking on your door (figuratively). So don’t try to just “wing it” on your return.
Background: Usually, you deduct the full amount of your charitable donations on your 2022 return, within specified annual limits. If you donate property that has appreciated in value, you can write off the fair market value (FMV) of the property on the date of the donation if you’ve owned it for more than one year. There’s no’s tax on the appreciation in value.
For example, suppose you bought a painting for $1,000 five years ago that is currently worth $10,000, and you donate the painting to a museum where it will be displayed. As a result, you’re allowed to deduct the entire $10,000. The $9,000 appreciation in value goes by the boards.
Conversely, if you donate property you’ve owned for a year or less, your deduction is limited to your cost. You get no tax benefit from any appreciation.
The annual deduction for donations of property is limited to 30% of adjusted gross income (AGI). Any excess may be carried over for up to five years. But first you have to meet the requirements for appraisals spelled out by the IRS. Specifically, the qualified appraiser must—
- Be certified by a professional organization or meet the education and experience requirements established by the Treasury Department.
- Be familiar with evaluating the type of property being donated.
- Regularly offer appraisals in return for a fee.
- Comply with any other requirements in the applicable tax regulations.
Appraisers must declare that they meet the requirements for being a qualified appraiser. In addition, they can’t be barred from practice before the IRS in the three years preceding the appraisal.
Furthermore, appraisers must declare that they understand that they face civil penalties for inadequate appraisals. The IRS can also assess a tax penalty for excessive valuations that a qualified appraiser should have known would be used on a tax return.
Reminder: The appraisal rules don’t apply to donations of publicly traded securities. Use the quoted market price to determine the FMV of the securities. This takes a lot of the guesswork out of the deduction.
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Tags: Income Tax, IRS, Taxes
