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Risks of a Tax Shelter Donation

While it's nice to get tax breaks from charitable donations, it may not be wise to go looking for them, especially if the resulting tax deduction is based on less than honest figures. There was a time when taxpayers were allowed to be on the honor system, so to speak, up to a certain limit regarding charitable donations. But because taxpayers have claimed charitable donations in gross proportion to the amount charities have benefited, new laws have been enacted complete with stiff penalties for cheaters.

You'll find the words "fair market value" used in conjunction with charitable donations of household goods like clothes, appliances, and even cars. However, the practice of taxpayers assessing the fair market value of their donated goods has been so abused, the term has been clarified by the Internal Revenue Service. Too many people, it seems, were simply dropping off their junk items at charitable organizations and then claiming inflated values for the junk.

You should certainly claim a tax deduction when you're entitled to one and charitable organizations are all too happy to provide you with receipts of your donations. However, it is still up to you to assess the value of those items; just be sure to follow the IRS guidelines when you do so. For example, thousands of people have donated cars to charities and then some have made the mistake of claiming a deduction equal to the "blue book" value of the car. While the IRS goes into detail on their website regarding the amount you can claim when donating a car, for the most part, it is now the amount for which the charity sells the car. That, and not the "blue book" price, becomes the fair market value.

Fair market value applies when you donate used clothing too. You cannot donate a box of old clothes and assess the value to be the amount those clothes cost new. It has been suggested to compare the prices at the store where the clothes will be sold and claim a comparable amount. After all, fair market value means the amount the item will likely bring when sold; not the over-inflated amount we'd like to claim.

Some people have fallen for scams directed toward people who are looking for tax shelters. For example, paintings have been sold at one price with the seller telling the buyer that the painting would appreciate thousands of dollars in value within a year or two in order for the buyer to claim an amount on their tax return that is greater than what they actually paid for the painting. Believing the inflated details told to them by the seller, people have then donated paintings and other goods specifically for the purpose of realizing a tax break. In the end, though, it just doesn't work and for those who try to make it work, there are stiff penalties in store for them.

For those truly interested in charitable giving, a tax break isn't at the forefront of their minds, but rather a perk after the fact. Unless you're itemizing deductions, a one-time household donation isn't likely to even find its way to your tax return. For those that do itemize, though, legitimate tax-deductible donations do ease the tax burden a bit.

Don't ever allow a "promoter" or anyone to inflate the value of your donation to a charitable organization because, regardless of what is written on your receipt, you are the one responsible for what is claimed on your tax return. For example, if someone solicits a donation from you to purchase certain items for a charity that will actually cost you $300 to purchase but then promises to arrange a receipt that will show the value of the donation at $3000, not only should you not allow this transaction to take place, you should not let any transaction take place with the person willing to perpetrate such a fraud.

Again, you are the only one responsible for what is listed on your tax return. Certainly take the deductions to which you are entitled, but don't try to inflate your charitable gifts. Remember the old saying, "tis better to give than to receive."