Deduct noncash gifts - with care

Take a thousand dollars in cash and checks to a church, and you won't get much quibbling from the Internal Revenue Service over its value. But drop off a bag of old clothes at the Salvation Army thrift shop, and chances are you'll cheat yourself out of hundreds of dollars worth of legitimate deductions.

Here's something to consider awhile for next year's taxes: If you donate noncash items such as clothing, furniture, or even automobiles to charitable organizations, and file an itemized tax return, you can deduct what is known as the fair market value of such gifts.

Internal Revenue Service Publications 526 and 561 discuss the process, but neither spells out exactly how to arrive at fair market value.

The result of this information vacuum, is that Americans annually cede hundreds of millions of dollars of overpaid taxes to the IRS, says Carey Rademacher, cocreator of the website Itsdeductible.com. "People are afraid of IRS audits, so they'll be extremely conservative" in valuing their donations, she says.

Ms. Rademacher's Omaha, Neb., company sells software ($29.95, at www.itsdeductible .com or 800-976-5358) that assigns a fair market price to more than 2,000 commonly donated items of clothes and other household items.

It has polled thrift and consignment shops nationwide on their pricing of these goods, and says its figures have withstood the scrutiny of IRS audits.

That's good news, because noncash contributions can trigger closer examinations by the government, says Mike Loughran, an IRS official in Des Moines, Iowa. The agency doesn't disclose its exact methods, but Mr. Loughran says that it has developed computer modeling that can spot returns whose numbers seem out of the ordinary.

Sometimes the agency will merely look at the Form 8282, which must be filed for any noncash deduction of $500 or more, to see what explanation it gives for a contribution. If that's the case, Loughran says it helps to attach any appraisals for high-priced items.

Sometimes the IRS will conduct a telephone interview with a taxpayer, and sometimes it will end up launching a full-blown audit. Either way, Loughran says, the agency doesn't want to discourage donations, it just wants to see rules followed. "You really should claim what you're entitled to," he says.

Arriving at the proper deduction amount may take some legwork, be it from using adequate software or a personal inspection of thrift stores to see what used shirts and skirts are fetching.

"Look around. See what other items are selling for," recommends Dave Barringer, of the national headquarters of Goodwill Industries Inc. To give you some proof of what you've donated, Rademacher suggests taking photos of the items. Mr. Barringer thinks a pencil and paper will come in handy.

"Itemize what you've given," he says of writing up a list. "That way, if you have an audit, you don't have to try to remember what you gave 18 months ago."

You're not likely to forget an '89 Buick, but if it's going to a charity, it likewise must have a fair market value assigned to it. Automobiles have become a very popular noncash charity item. The National Kidney Foundation alone takes in 75,000 used autos a year under its Kidney Cars program, raising $20 million in the process.

As with other charities, the Kidney Foundation will merely give you a receipt for the donation. It doesn't get into the pricing game, so it's up to you to determine the fair market value.

"They [donors] can claim fair market value on it, which is not necessarily Blue Book value," says Julia Andersen, manager of the Kidney Foundation's auto-donation program. She send donors to auto-pricing websites such as Edmunds.com, Carprice.com and Nadaguides .com. There, owners can plug in the make, model, mileage, and condition of their autos to get a decent idea of what they're worth.

Ms. Andersen cautions donors to make sure that the proper people are handling their auto donations. In most states, the title on the auto must be signed over directly to a legitimate charity, or the entire value of the donation may be lost.

She also warns that some websites will claim to represent charities, when in fact they are nothing more than scams. Contact your charity directly to make sure it is operating a program or has authorized the website to do so.

Donors should take extra care when determining auto values, warns Loughran of the IRS. They've become popular with the IRS, too - as a deduction that merits a closer look. Don't get caught trying to explain why a jalopy with no engine is worth as much as you paid for your last used car.