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 (FMV) 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, aircraft, 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 that a taxpayer may deduct from their taxable income.
- The 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, including 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 a charitable donation's 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. Individual taxpayers have a standard deduction of $12,950 for the 2022 tax year ($13,850 for 2023). This means that 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 (AGI) 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 an FMV of the asset they are donating.
Identifying Fair Market Value (FMV)
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
Determining an asset's fair market value isn't always simple, specifically when prices may not be readily available or when donated assets may have certain restrictions. When it's ambiguous, the IRS suggests valuing the asset at the estimated sale price at the time the donor gave it to the organization or by comparing the price to the sales price of a similar item.
IRS FMVs 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 upon between a willing buyer and a willing seller. Neither should have the obligation to act (arm's length conditions) and both should have reasonable knowledge of the relevant facts.
Following standard fair market value accounting practices suggested by Generally Accepted Accounting Principles (GAAP) 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.
Donations and Special Asset Classes
Certain asset classes 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 they turn 73 or later, according to the SECURE Act 2.0. The previous rules apply to retirees who turned 72 on or before Dec. 31, 2022, and 70½ on or before Dec. 31, 2019. Keep in mind that any amounts given to a qualified charitable organization through an IRA will also reduce the required minimum distribution (RMD).
Assets that are donated with certain restrictions must be priced at the value they are worth with the restrictions put into place.
$500 and $5,000 or More
Taxpayers must generally file Form 8283: Noncash Charitable Contributions 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.
Fines and Penalties
IRS Publication 561 says that taxpayers who are found to have overstated the fair market value of a donated asset can be subject to certain fines and penalties. For instance:
- A 20% penalty applies to overstatements of 150%
- A 40% penalty applies to overstatements of 200% or more
Form 8282: Donee Information Return Explanation
Form 8282: Donee Information Return (Sale, Exchange, or Disposition of Donated Property) 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.