Disclaimer:  This information is not intended to dispute or replace the advice of a tax preparation specialist, accountant or attorney.   PersonalFinanceAnalyst.com advises its readers to consult with a tax professional to determine the deductions for which they may qualify.

If you don’t already have your W-2s, they should be on their way.  It’s that time again.  Taxes.  And, like most people, you might be wondering what you can do this year to minimize your tax liability.  The search for deductions is underway.

One of the best known deductions is the charitable contribution.  The U.S. government makes the idea of donating to a recognized charity a little more attractive by providing a tax benefit to those who give.  

There are rules associated with donations.  Before we discuss the process of how to value a charitable contribution, it makes sense to revisit a few of those basic guidelines.

• Your donation must go to a qualified tax-exempt charitable organization.  Generally speaking, the charities must qualify under as 501(c)(3) organizations.  If the tax implications of giving are important to you and you’re not sure about an organization’s status, ask before you give. 
• You can only use the deduction if you’re itemizing on your return.  Those with simple tax situations who plan on taking the standard deduction won’t catch a break based on their generosity.  If you’re not itemizing, you’re not going to gain a tax advantage.
• There are different limits on deductions.  You can usually deduct cash contributions up to 50% of your adjusted gross income.  Deductions for property contributions cap at 30%.  You can generally deduct appreciated capital gains assets up to the 20% mark. 

It’s also worth noting that you shouldn’t itemize to claim deductions just because you can.  If your total itemized deductions don’t exceed the standard deduction, there’s no real reason to itemize.

If you make a cash donation, the valuation process is simple.  You can claim the dollar amount donated.  Things get a little stickier, however, when you’re dealing with non-cash contributions.

The Acting Director of the IRS once said that they “want people to be focused on helping these worth groups than worrying about tax issues.”  They’ve tried to accomplish that with respect to charitable giving by creating a very subjective process.  Although there are rules to follow, they leave a great deal of discretion in the hands of the individual taxpayer.  As one expert once noted, “How aggressive one wants to be on a tax return is a very personal decision”.

That discretionary aggression must take place within the general guideline that governs how to value charitable contributions:  Fair market value.

That’s the rule of thumb.  If you donate it, you can claim it’s fair market value.  That doesn’t represent the price of the item “new in the box”, but it’s actual reasonably ascertainable value in the marketplace.  

For instance, those who donate automobiles are often given a high-to-low range of potential values for the make and model given.  The charity will not, however, usually provide any instruction on what exact value to claim.  When it comes to valuing non-cash contributions, you’re left to your own devices to set those numbers.  As MoneyBlueBook noted:

The donation valuation process is generally subjective and you are responsible for assigning the proper value for your charitable donations. There is no exact IRS formula or chart as the agency relies on subjective approximations. 

Resist the temptation to go crazy, however.  If you decide to push the envelope on your claims, it’s like sending the IRS an embossed invitation to audit you.  According to MoneyBlueBook (referencing the valuation process for donated clothing):

When donating clothes for the tax deduction, the worst thing you can do is to drastically overestimate the donated clothing value and trigger an alarm bell. Triggering a red flag will send the IRS man running to your home to request receipts and proof of your donation. Because charitable donation is one of those tax items frequently abused by taxpayers, the IRS closely scrutinizes such claims.

In other words, be honest and accurate.

But just in case, keep good records.  Get receipts and follow the rules regarding third-party valuations for donated items with values in excess of $5,000.  The general rule is “fair market value” but everyone should consult IRS recommendations and heed the advice of a qualified tax professional before filing their taxes.