What Is IRS Publication 561: Determining the Value of Donated Property?
IRS Publication 561: Determining the Value of Donated Property, is a document published by the Internal Revenue Service (IRS) that provides taxpayers with information on how to determine the fair market value for assets donated to a qualified organization. Taxpayers can donate a wide variety of assets, including household goods, used clothing, jewelry and gems, art, collections, vehicles, boats, aircrafts, inventory from a personal business, patents, stocks, bonds, real estate, financial contracts, and certain interest rights.
- IRS Publication 561 provides guidance for determining the fair value of charitable contributions for which a taxpayer may wish to deduct from their taxable income.
- In general, IRS fair market valuations are in line with standard accounting practices which require a valuation to be based on a selling price in the open market.
- The IRS suggests four approaches when an open market price is not readily available: cost or selling price, comparable asset, replacement cost, and expert opinion.
- Taxpayers must generally file Form 8283 if the fair market value of donations is more than $500.
- If charitable donation fair value is determined to be $5,000 or more a qualified appraisal is required to be submitted.
Understanding IRS Publication 561: Determining the Value of Donated Property
IRS Publication 561 primarily targets individual taxpayers. It provides guidance on valuing donated property as a charitable contribution for the purpose of income deduction. For the 2019 tax year, most individual taxpayers have a standard deduction of $12,200, therefore itemized deductions including any donated property would need to collectively exceed the standard deduction to be worthwhile. There are also some important considerations a taxpayer should consider before seeking to make tax deductible charitable contributions. Contributions must be made to a Qualified Charitable Organization. Additionally, deduction values are generally limited to 60% of a taxpayer's adjusted gross income in most cases but 20% and 30% limits may apply. IRS Publication 526: Charitable Contributions provides full details on claiming a donated asset as a tax deduction.
IRS Publication 561 provides guidance for determining the fair value of donated assets which can translate to an itemized tax deductible value. Publication 561 requires donators to begin by determining a fair market value of the asset they are donating.
Identifying Fair Market Value
IRS fair market valuations are in line with standard accounting practices which require a valuation to be based on a selling price in the open market. This valuation should be agreed on between a willing buyer and a willing seller with neither being required to act (arm's length conditions) and both having reasonable knowledge of the relevant facts.
Determining a fair market value is not always a simple process, specifically when prices in the open market may not be readily available or when donated assets may have certain restrictions. In these cases of ambiguity, the IRS suggests valuing the asset at the price it would be sold at by the organization the donor gave it to. Another possible method is to compare the price of the item to the sales price of a similar item. Assets given with certain restrictions must be priced at the value they are worth with restrictions in place.
Some types of assets will have a more concrete value such as annuities, stocks, bonds, and financial contracts. Many of these assets can be immediately transacted on financial exchanges which determines their fair market value. Individuals can begin to use their Individual Retirement Accounts (IRAs) and inherited IRAs to make qualified charitable distributions after turning 70½ or later. However, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, starting in the year an individual turns 72, any amounts given to a qualified charitable organization through an IRA will also reduce the required minimum distribution (RMD).
Following standard fair market value accounting practices suggested by Generally Accepted Accounting Principles is a suitable approach for many types of assets. Some assets may require the services of an appraiser to determine their fair market value. Appraisers may be used in valuing real estate property or other high value assets.
In general, the IRS outlines four approaches for identifying fair market value:
- Cost or selling price
- Sales of comparable assets
- Replacement cost
- Opinions of experts
In Publication 561, the IRS also details guidance for asset valuations of the following:
- Household goods
- Used clothing
- Jewelry and gems
- Vehicles, boats, and aircrafts
- Inventory from a personal business
- Stocks and bonds
- Real estate
- Interest in a business
- Annuities, interest for life or term of years, remainders, and reversions
- Certain life insurance and annuity contracts
- Partial interest in property not in trust
$500 and $5,000 or More
Taxpayers must generally file Form 8283 if the fair market value of donations is more than $500. Taxpayers should be aware that assets with a fair value of $5,000 or more require a qualified appraisal to be submitted.
IRS Publication 561 says that taxpayers who are found to have overstated the fair market value of a donated asset can be subject to penalties. A 20% penalty applies to overstatements of 200%. A 40% penalty applies to overstatements of 400% or more.
Form 8282: Donee Information Return Explanation
Form 8282 is a second IRS form that may be associated with charitable contributions. Donors may receive this form from the donee if the asset has a fair market value of more than $500 and is disposed of within three years. If these conditions are met, donees should provide Form 8282 to donors and the IRS.