Schedule A Deductions
Certain deductions are permitted to be deducted against gross income when determining a taxpayer's correct tax liability. In order to take advantage of these deductions, a taxpayer must have deductions that exceed their standard deduction amount for the year (the standard deduction for tax year 2011 is $5800). See here for what Schedule A looks like.
Medical Expenses
Certain medical and dental expenses may be deducted against gross income under I.R.C. Sec. 213(a). The only medical expenses permitted to be deducted under this Section are those that exceed 7.5 % of the taxpayer's adjusted gross income for the 2011 tax year and 10 % of adjusted gross income for tax years 2013 and thereafter. Additionally, the expenses must be paid out of the taxpayer's own pocket, i.e., medical or dental expenses that were paid for by the taxpayer's health insurance policy do not qualify. Prescription drugs or medicine can be deducted also (but note it must be accompanied with a prescription - i.e., purchases of Advil or nicotine patches at a pharmacy do not qualify). See I.R.C. Sec. 213(b). Cosmetic surgery (such as plastic surgery) also does not qualify as a "medical expense" unless the procedure is necessary to alleviate "a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease." See I.R.C. Sec. 213(d)(9).
Additionally, medical insurance premiums paid each year can be counted towards medical expenses as long as the policy covers medical care. Life insurance policies as well as disability insurance cannot be included in this amount. If the taxpayer's employer pays for the health insurance premiums, they may only be deducted if included in the taxpayer's wages (the premiums must be included in Box 1 of the taxpayer's W-2).
The taxpayer's payroll tax for coverage in Medicare A is not a medical expense. However, if the taxpayer voluntarily enrolls in Midicare part A, they may include the payment of premiums as a medical expense. Medicare part B and D are also included in the taxpayer's medical expenses.
IRS Publication 502 includes a laundry list of medical expenses that are deductible which include: (1) legal abortion expenses; (2) acupuncture; (3) inpatient for alcohol treatment and drug addiction (including meals and lodging); (4) ambulatory services; (5) procurement of artificial limbs or artificial teeth; (7) birth control pills prescribed by your doctor; (8) breast pumps; (9) breast reconstruction surgery following breast cancer; (10) chiropractor expenses; (11) laser eye surgery; and (12) hearing aids.
Finally, it should be noted that certain capital expenditures may also be deductible as medical expenses, subject to one limitation. If the expenditure increases the fair market value of your home, you must reduce the medical expense deductible by the increase in the fair market value of the home. For example, if you build a wheelchair ramp for your home, and it increases the fair market value of the home by $2000, and it costs $10,000 for a contractor to build, you would be permitted to deduct $8,000 under Schedule A (subject to the 7.5 % limitation mentioned above).
For more information pertaining to medical and dental expenses, see Publication 502.
Example: Mary has gross income of $100,000 for the 2011 tax year that she earned from her employment. Additionally, Mary has $20,000 of medical expenses she incurred throughout the year. Out of the $20,000, Mary had to pay $4000 and her health insurance company paid the remaining $16,000. Mary's Adjusted Gross Income ("AGI") for the year is also $100,000. Mary has no other qualifying Schedule A deductions throughout the year. In this example, Mary would not be able to deduct any of the medical expenses. First, Mary must have medical expenses in excess of $7500 for the year in order to take advantage of Section 213(a). Because Mary only has $4000, none of the deductions are allowed. Also, the standard deduction for tax year 2011 is $5800. Mary must have more than $5800 in Schedule A deductions for it to give Mary any favorable tax treatment.
Home Mortgage Interest
Normally, personal interest is disallowed as a deduction under the Internal Revenue Code, with some exceptions. One such exception is that for "qualified residence interest." Two types of interest qualify for this purpose - interest related to the acquisition of a home or home equity interest. Your bank will usually provide you the amount of interest paid on your home through use of a Form 1098. A "qualified residence" is the principal residence of the taxpayer AND one other residence chosen by the taxpayer. If you do not rent out the second home, you may use it as a qualified residence (you do not have to use the home during the year). If you do use the second home at any point during the year as a rental property, you must use the home yourself during the year for the greater of 14 days or 10 % of the number of days the home was rented out for fair market value. [Also, keep in mind that if you have a rental property, you may be entitled to deduct the interest as a rental expense on Schedule E of your tax return]. Keep in mind, as with the medical expenses, the taxpayer must have in the aggregate deductions that exceed the standard deduction (for 2011, the standard deduction is $5800). The debt on the house also must be secured debt.
Many times a home mortgage loan will come with "points" which is essentially prepaid interest by the borrower. These may also be known as origination fees. In order to fully deduct these "points" in the taxable year, the taxpayer must meet ALL of the following:
(1) The loan is secured by your main home (the home you reside in);
(2) "Paying points is an established business practice in the area where the loan is made;"
(3) You are a cash-basis taxpayer (not accrual);
(4) "The points paid were not more than the points generally charged in that area;"
(5) "The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes;"
(6) "The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker;"
(7) "You use the loan to buy or build your own home;"
(8) "The points were computed as a percentage of the principal amount of the mortgage;"
(9) "The amount is clearly shown on the settlement statement (such as the HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's."
If the taxpayer meets all nine requirements above, they can elect to either take the deduction immediately or deduct them over the lifetime of the loan. If the loan was made to only improve your main home (i.e. not acquire it), the taxpayer only has to meet the first six to immediately deduct in the year paid.
If the loan originated to either acquire a second home or improve a second home, the points must be deducted over the lifetime of the loan.
For more information about the home mortgage interest deduction, see Publication 936.
Example: Julie earns $50,000 from her current place of employment during 2011. Julie also owns a home in which she paid $11,000 in mortgage interest for the 2011 tax year. Julie resides in this home and it is her principal residence for tax purposes. Julie may deduct the $11,000 mortgage interest on Schedule A because the $11,000 exceeds the $5,800 standard deduction for the year.
Certain Taxes Paid Throughout the Tax Year
A taxpayer may deduct on Schedule A various taxes imposed upon him throughout the tax year. The most common are state and local real property taxes, state and local personal property taxes, state and local income taxes, and qualified motor vehicle taxes. See, e.g., I.R.C. Sec. 164(a). Additionally, a taxpayer may elect to use the state and local sales taxes instead of state and local income taxes (this may be advantageous, for example, if the taxpayer lives in a state that does not impose income taxes). I.R.C. Sec. 164(b). If the taxpayer elects to use the state and local sales tax method, the taxpayer can keep all receipts for sales taxes paid throughout the year or, more commonly, use a statistical table to determine the amount allowed. The I.R.S. also has an easy-to-use online calculator that may be used to determine the correct amount. See here.
"Qualified motor vehicle taxes" are those taxes (both sales and excise) imposed by the state or local government in which the taxpayer purchases and registers his vehicle. Notably, the cost of the vehicle may not exceed $49,500 and if it does, the taxes imposed on anything over the $49,500 is not deductible. See I.R.C. Sec. 164(b)(6)(B). Also, there are certain income limitations applicable whereby the amount allowed to be deducted is phased out when the taxpayer's modified adjusted gross income exceeds $125,000. I.R.C. Sec. 164(b)(6)(C). A "qualified motor vehicle" is generally any vehicle that does not exceed 8500 pounds and of which "the original use commences with the taxpayer." Motorcyles and motor homes can also be "qualified motor vehicles." A taxpayer may not deduct the actual taxes imposed for a "qualified motor vehicle" purchased in the year if the taxpayer elects to deduct local and sales taxes instead of income taxes.
Example: Alice purchases a new automobile in tax year 2011 for $15,000. The sales tax imposed on the purchase of the vehicle is $1500. Alice also has $11,000 in home mortgage interest she paid in 2011. Alice may deduct $12,500 on Schedule A of her income tax return. If Alice did not have any mortgage interest throughout the year and did not have any other deductions allowed under Schedule A, she may not deduct the $1500, but may take the $5,800 standard deduction.
Charitable Contributions
Taxpayers that make charitable contributions to qualified entities are entitled to a deduction on Schedule A, subjec to certain limitations. Qualified entities include Section 501(c)(3) organizations (e.g. Salvation Army); churches; and U.S. states and the federal government as long as the donation is used for a public purpose. If you are in doubt as to whether your donation is deductible, it is advisable to ask the organization or perform a search here.
If the charitable contribution is accompanied by a benefit to the taxpayer, the taxpayer must adjust their charitable contribution accordingly. Thus, a taxpayer normally must reduce the charitable contribution amount given by the fair market value of goods or services received.
Example: J.P. donates $10,000 to his alma mater, an eligible Section 501(c)(3) organization. Due to J.P.'s generous donation, the school sends him season tickets to their football games (that have a fair market value of $1000). J.P. may deduct $9000 as a charitable contribution (the excess of his donation over the fair market value of the tickets he received).
A taxpayer that donates their time to the organization may not deduct the fair market value of their services as a charitable contribution. However, the taxpayer may deduct the costs associated with getting to and from the qualified organization (e.g. gas and oil costs).
Example: Larry is an attorney that normally charges $150 an hour for his services. Larry volunteers 10 hours of his time to a Section 501(c)(3) organization. Additionally, Larry drives his own car 20 miles to and from the organization. Larry may NOT take a $1500 charitable contribution for the fair market value of the services he provided to the organization. Larry may deduct the costs associated with getting to and from the organization. If Larry does not keep track of the direct expenses associated with his travel, Larry may deduct 14 cents per mile (and Larry would need to keep a record to substantiate the mileage he drove).
A taxpayer is prohibited from taking a charitable deduction for donations to specific individuals. However, the taxpayer may provide a qualified entity with the donation, and the qualified entity can turn around and provide the donation to the individual.
Example: Ned lives in New York City and a homeless individual solicits donations from Ned. Ned, feeling altruistic, gives the homeless individual $300. Ned may not deduct the $300 as a charitable contribution despite the fact that the Ned performed an act of charity. If Ned gives $300 to a 501(c)(3) organization which in turn gives the $300 to the homeless individual, Ned could take the $300 charitable contribution deduction.
Fees associated with ascertaining the fair market value of property you wish to contribute to a qualified entity are not deductible as a charitable contribution. For example, if you wish to donate a car to a 501(c)(3) organization, and pay $200 to get it appraised, the $200 is not a charitable deduction. Rather, the $200 is allowed as a miscellaneous itemized deduction (the aggregate of your miscellaneous itemized deductions must exceed 2 % of your adjusted gross income to be deductible).
There are special rules for certain types of property a taxpayer may donate. A brief summary of some of these rules follow:
Taxpayers routinely donate items of clothing or household items to 501(c)(3) organizations such as Goodwill. These donations are deductible if the items donated are in good condition or better. If the item of clothing or household item is not in good condition, you can still deduct it but only if the fair market value of the item is $500 or more. For the latter, the taxpayer must also attach a qualified appraisal to the return. "Household items" means all household items except: (1) food items; (2) paintings, antiques and other collections; and (3) jewelry.
The donation of clothing or household items are limited to their fair market value on the date of the contribution. Courts have routinely defined fair market value to mean "the price at which property would change hands between a willing buyer and seller, neither being under the compulsion to buy or sell, and both parties having knowledge of all relevant facts." Thus, when determining fair market value of these items, the taxpayer has to keep in mind what an independent buyer would actually pay for the item(s) (taking into account stores that sell these items such as consignment stores, Ebay, and thrift stors). In some cases, the items of clothing or household items may have very little value and if the IRS audits, the taxpayer has the burden of proving the fair market value of the items donated. Thus, it is advisable to keep pictures of the items and receipts given by the 501(c)(3) to substantiate your donation and its valuation.
The donation of an automobile, boat, or airplane is also deductible, subject to certain requirements. For donations of over $500, the taxpayer is only entitled to the lesser of (1) the gross proceeds from the subsequent sale of the vehicle by the organization or (2) the vehicle's fair market value on the date of the donation. When the taxpayer donates his vehicle to an eligible entity, it is imperative to ensure he or she receives a Form 1098-C. Without the Form 1098-C (which must be attached to the taxpayer's return), the taxpayer is not entitled to the deduction. The Form 1098-C will inform the taxpayer of the gross proceeds from the subsequent sale.
There are two notable exceptions for when a taxpayer can report the fair market value of the donation as opposed to the gross proceeds. The Form 1098-C will show whether either of these exceptions applies.
As mentioned above, the taxpayer is only entitled to take the lesser of the fair market value or the gross proceeds from the vehicle (subject to the two exceptions above). THus, it is imperative for the taxpayer to ascertain the fair market value of the vehicle on the date of the donation. The IRS cautions the use of "blue books" for determining value and provides these are not official appraisals. However, the IRS does concede this offer "clues" to the proper value of the vehicle, as long as the taxpayer takes into account other factors such as mechanical and cosmetic issues, mileage, location of vehicle, etc. The taxpayer may only use the private party sale numbers and not the dealer retail sales value. Also, the internet can be a powerful tool to search for fair market value determinations.
Large boats should be surveyed by experts in that specific field due to the uniqueness of determining the fair market value of boats.
Grants of partial intersts in property or real estate is not deductible. For example, if the taxpayer owns an an office building and grants the use of half the building to a Section 501(c)(3), that taxpayer may not deduct the fair market value of the rent that he otherwise would have charged.
Donations of inventory to a qualified entity are limited to the smaller of the fair market value of the inventory or the cost (basis) of the item.
The general rule is that if the taxpayer contributes property that has decreased in value since the date of purchase, the taxpayer is limited to a deduction of the fair market value.
Example: Angie purchased a television for $500. One year later, Angie donates the television to a 501(c)(3) organization. The television's fair market value on the date of the donation is $200. Angie's adjusted basis in the television is $500 (what she paid for the television) and Angie is limited to a charitable contribution deduction of $200 (the fair market value because it is less than her adjusted basis).
Different rules apply for contributions of property that have appreciated in value since their purchase.
Certain deductions are permitted to be deducted against gross income when determining a taxpayer's correct tax liability. In order to take advantage of these deductions, a taxpayer must have deductions that exceed their standard deduction amount for the year (the standard deduction for tax year 2011 is $5800). See here for what Schedule A looks like.
Medical Expenses
Certain medical and dental expenses may be deducted against gross income under I.R.C. Sec. 213(a). The only medical expenses permitted to be deducted under this Section are those that exceed 7.5 % of the taxpayer's adjusted gross income for the 2011 tax year and 10 % of adjusted gross income for tax years 2013 and thereafter. Additionally, the expenses must be paid out of the taxpayer's own pocket, i.e., medical or dental expenses that were paid for by the taxpayer's health insurance policy do not qualify. Prescription drugs or medicine can be deducted also (but note it must be accompanied with a prescription - i.e., purchases of Advil or nicotine patches at a pharmacy do not qualify). See I.R.C. Sec. 213(b). Cosmetic surgery (such as plastic surgery) also does not qualify as a "medical expense" unless the procedure is necessary to alleviate "a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease." See I.R.C. Sec. 213(d)(9).
Additionally, medical insurance premiums paid each year can be counted towards medical expenses as long as the policy covers medical care. Life insurance policies as well as disability insurance cannot be included in this amount. If the taxpayer's employer pays for the health insurance premiums, they may only be deducted if included in the taxpayer's wages (the premiums must be included in Box 1 of the taxpayer's W-2).
The taxpayer's payroll tax for coverage in Medicare A is not a medical expense. However, if the taxpayer voluntarily enrolls in Midicare part A, they may include the payment of premiums as a medical expense. Medicare part B and D are also included in the taxpayer's medical expenses.
IRS Publication 502 includes a laundry list of medical expenses that are deductible which include: (1) legal abortion expenses; (2) acupuncture; (3) inpatient for alcohol treatment and drug addiction (including meals and lodging); (4) ambulatory services; (5) procurement of artificial limbs or artificial teeth; (7) birth control pills prescribed by your doctor; (8) breast pumps; (9) breast reconstruction surgery following breast cancer; (10) chiropractor expenses; (11) laser eye surgery; and (12) hearing aids.
Finally, it should be noted that certain capital expenditures may also be deductible as medical expenses, subject to one limitation. If the expenditure increases the fair market value of your home, you must reduce the medical expense deductible by the increase in the fair market value of the home. For example, if you build a wheelchair ramp for your home, and it increases the fair market value of the home by $2000, and it costs $10,000 for a contractor to build, you would be permitted to deduct $8,000 under Schedule A (subject to the 7.5 % limitation mentioned above).
For more information pertaining to medical and dental expenses, see Publication 502.
Example: Mary has gross income of $100,000 for the 2011 tax year that she earned from her employment. Additionally, Mary has $20,000 of medical expenses she incurred throughout the year. Out of the $20,000, Mary had to pay $4000 and her health insurance company paid the remaining $16,000. Mary's Adjusted Gross Income ("AGI") for the year is also $100,000. Mary has no other qualifying Schedule A deductions throughout the year. In this example, Mary would not be able to deduct any of the medical expenses. First, Mary must have medical expenses in excess of $7500 for the year in order to take advantage of Section 213(a). Because Mary only has $4000, none of the deductions are allowed. Also, the standard deduction for tax year 2011 is $5800. Mary must have more than $5800 in Schedule A deductions for it to give Mary any favorable tax treatment.
Home Mortgage Interest
Normally, personal interest is disallowed as a deduction under the Internal Revenue Code, with some exceptions. One such exception is that for "qualified residence interest." Two types of interest qualify for this purpose - interest related to the acquisition of a home or home equity interest. Your bank will usually provide you the amount of interest paid on your home through use of a Form 1098. A "qualified residence" is the principal residence of the taxpayer AND one other residence chosen by the taxpayer. If you do not rent out the second home, you may use it as a qualified residence (you do not have to use the home during the year). If you do use the second home at any point during the year as a rental property, you must use the home yourself during the year for the greater of 14 days or 10 % of the number of days the home was rented out for fair market value. [Also, keep in mind that if you have a rental property, you may be entitled to deduct the interest as a rental expense on Schedule E of your tax return]. Keep in mind, as with the medical expenses, the taxpayer must have in the aggregate deductions that exceed the standard deduction (for 2011, the standard deduction is $5800). The debt on the house also must be secured debt.
Many times a home mortgage loan will come with "points" which is essentially prepaid interest by the borrower. These may also be known as origination fees. In order to fully deduct these "points" in the taxable year, the taxpayer must meet ALL of the following:
(1) The loan is secured by your main home (the home you reside in);
(2) "Paying points is an established business practice in the area where the loan is made;"
(3) You are a cash-basis taxpayer (not accrual);
(4) "The points paid were not more than the points generally charged in that area;"
(5) "The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes;"
(6) "The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker;"
(7) "You use the loan to buy or build your own home;"
(8) "The points were computed as a percentage of the principal amount of the mortgage;"
(9) "The amount is clearly shown on the settlement statement (such as the HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's."
If the taxpayer meets all nine requirements above, they can elect to either take the deduction immediately or deduct them over the lifetime of the loan. If the loan was made to only improve your main home (i.e. not acquire it), the taxpayer only has to meet the first six to immediately deduct in the year paid.
If the loan originated to either acquire a second home or improve a second home, the points must be deducted over the lifetime of the loan.
For more information about the home mortgage interest deduction, see Publication 936.
Example: Julie earns $50,000 from her current place of employment during 2011. Julie also owns a home in which she paid $11,000 in mortgage interest for the 2011 tax year. Julie resides in this home and it is her principal residence for tax purposes. Julie may deduct the $11,000 mortgage interest on Schedule A because the $11,000 exceeds the $5,800 standard deduction for the year.
Certain Taxes Paid Throughout the Tax Year
A taxpayer may deduct on Schedule A various taxes imposed upon him throughout the tax year. The most common are state and local real property taxes, state and local personal property taxes, state and local income taxes, and qualified motor vehicle taxes. See, e.g., I.R.C. Sec. 164(a). Additionally, a taxpayer may elect to use the state and local sales taxes instead of state and local income taxes (this may be advantageous, for example, if the taxpayer lives in a state that does not impose income taxes). I.R.C. Sec. 164(b). If the taxpayer elects to use the state and local sales tax method, the taxpayer can keep all receipts for sales taxes paid throughout the year or, more commonly, use a statistical table to determine the amount allowed. The I.R.S. also has an easy-to-use online calculator that may be used to determine the correct amount. See here.
"Qualified motor vehicle taxes" are those taxes (both sales and excise) imposed by the state or local government in which the taxpayer purchases and registers his vehicle. Notably, the cost of the vehicle may not exceed $49,500 and if it does, the taxes imposed on anything over the $49,500 is not deductible. See I.R.C. Sec. 164(b)(6)(B). Also, there are certain income limitations applicable whereby the amount allowed to be deducted is phased out when the taxpayer's modified adjusted gross income exceeds $125,000. I.R.C. Sec. 164(b)(6)(C). A "qualified motor vehicle" is generally any vehicle that does not exceed 8500 pounds and of which "the original use commences with the taxpayer." Motorcyles and motor homes can also be "qualified motor vehicles." A taxpayer may not deduct the actual taxes imposed for a "qualified motor vehicle" purchased in the year if the taxpayer elects to deduct local and sales taxes instead of income taxes.
Example: Alice purchases a new automobile in tax year 2011 for $15,000. The sales tax imposed on the purchase of the vehicle is $1500. Alice also has $11,000 in home mortgage interest she paid in 2011. Alice may deduct $12,500 on Schedule A of her income tax return. If Alice did not have any mortgage interest throughout the year and did not have any other deductions allowed under Schedule A, she may not deduct the $1500, but may take the $5,800 standard deduction.
Charitable Contributions
Taxpayers that make charitable contributions to qualified entities are entitled to a deduction on Schedule A, subjec to certain limitations. Qualified entities include Section 501(c)(3) organizations (e.g. Salvation Army); churches; and U.S. states and the federal government as long as the donation is used for a public purpose. If you are in doubt as to whether your donation is deductible, it is advisable to ask the organization or perform a search here.
If the charitable contribution is accompanied by a benefit to the taxpayer, the taxpayer must adjust their charitable contribution accordingly. Thus, a taxpayer normally must reduce the charitable contribution amount given by the fair market value of goods or services received.
Example: J.P. donates $10,000 to his alma mater, an eligible Section 501(c)(3) organization. Due to J.P.'s generous donation, the school sends him season tickets to their football games (that have a fair market value of $1000). J.P. may deduct $9000 as a charitable contribution (the excess of his donation over the fair market value of the tickets he received).
A taxpayer that donates their time to the organization may not deduct the fair market value of their services as a charitable contribution. However, the taxpayer may deduct the costs associated with getting to and from the qualified organization (e.g. gas and oil costs).
Example: Larry is an attorney that normally charges $150 an hour for his services. Larry volunteers 10 hours of his time to a Section 501(c)(3) organization. Additionally, Larry drives his own car 20 miles to and from the organization. Larry may NOT take a $1500 charitable contribution for the fair market value of the services he provided to the organization. Larry may deduct the costs associated with getting to and from the organization. If Larry does not keep track of the direct expenses associated with his travel, Larry may deduct 14 cents per mile (and Larry would need to keep a record to substantiate the mileage he drove).
A taxpayer is prohibited from taking a charitable deduction for donations to specific individuals. However, the taxpayer may provide a qualified entity with the donation, and the qualified entity can turn around and provide the donation to the individual.
Example: Ned lives in New York City and a homeless individual solicits donations from Ned. Ned, feeling altruistic, gives the homeless individual $300. Ned may not deduct the $300 as a charitable contribution despite the fact that the Ned performed an act of charity. If Ned gives $300 to a 501(c)(3) organization which in turn gives the $300 to the homeless individual, Ned could take the $300 charitable contribution deduction.
Fees associated with ascertaining the fair market value of property you wish to contribute to a qualified entity are not deductible as a charitable contribution. For example, if you wish to donate a car to a 501(c)(3) organization, and pay $200 to get it appraised, the $200 is not a charitable deduction. Rather, the $200 is allowed as a miscellaneous itemized deduction (the aggregate of your miscellaneous itemized deductions must exceed 2 % of your adjusted gross income to be deductible).
There are special rules for certain types of property a taxpayer may donate. A brief summary of some of these rules follow:
Taxpayers routinely donate items of clothing or household items to 501(c)(3) organizations such as Goodwill. These donations are deductible if the items donated are in good condition or better. If the item of clothing or household item is not in good condition, you can still deduct it but only if the fair market value of the item is $500 or more. For the latter, the taxpayer must also attach a qualified appraisal to the return. "Household items" means all household items except: (1) food items; (2) paintings, antiques and other collections; and (3) jewelry.
The donation of clothing or household items are limited to their fair market value on the date of the contribution. Courts have routinely defined fair market value to mean "the price at which property would change hands between a willing buyer and seller, neither being under the compulsion to buy or sell, and both parties having knowledge of all relevant facts." Thus, when determining fair market value of these items, the taxpayer has to keep in mind what an independent buyer would actually pay for the item(s) (taking into account stores that sell these items such as consignment stores, Ebay, and thrift stors). In some cases, the items of clothing or household items may have very little value and if the IRS audits, the taxpayer has the burden of proving the fair market value of the items donated. Thus, it is advisable to keep pictures of the items and receipts given by the 501(c)(3) to substantiate your donation and its valuation.
The donation of an automobile, boat, or airplane is also deductible, subject to certain requirements. For donations of over $500, the taxpayer is only entitled to the lesser of (1) the gross proceeds from the subsequent sale of the vehicle by the organization or (2) the vehicle's fair market value on the date of the donation. When the taxpayer donates his vehicle to an eligible entity, it is imperative to ensure he or she receives a Form 1098-C. Without the Form 1098-C (which must be attached to the taxpayer's return), the taxpayer is not entitled to the deduction. The Form 1098-C will inform the taxpayer of the gross proceeds from the subsequent sale.
There are two notable exceptions for when a taxpayer can report the fair market value of the donation as opposed to the gross proceeds. The Form 1098-C will show whether either of these exceptions applies.
As mentioned above, the taxpayer is only entitled to take the lesser of the fair market value or the gross proceeds from the vehicle (subject to the two exceptions above). THus, it is imperative for the taxpayer to ascertain the fair market value of the vehicle on the date of the donation. The IRS cautions the use of "blue books" for determining value and provides these are not official appraisals. However, the IRS does concede this offer "clues" to the proper value of the vehicle, as long as the taxpayer takes into account other factors such as mechanical and cosmetic issues, mileage, location of vehicle, etc. The taxpayer may only use the private party sale numbers and not the dealer retail sales value. Also, the internet can be a powerful tool to search for fair market value determinations.
Large boats should be surveyed by experts in that specific field due to the uniqueness of determining the fair market value of boats.
Grants of partial intersts in property or real estate is not deductible. For example, if the taxpayer owns an an office building and grants the use of half the building to a Section 501(c)(3), that taxpayer may not deduct the fair market value of the rent that he otherwise would have charged.
Donations of inventory to a qualified entity are limited to the smaller of the fair market value of the inventory or the cost (basis) of the item.
The general rule is that if the taxpayer contributes property that has decreased in value since the date of purchase, the taxpayer is limited to a deduction of the fair market value.
Example: Angie purchased a television for $500. One year later, Angie donates the television to a 501(c)(3) organization. The television's fair market value on the date of the donation is $200. Angie's adjusted basis in the television is $500 (what she paid for the television) and Angie is limited to a charitable contribution deduction of $200 (the fair market value because it is less than her adjusted basis).
Different rules apply for contributions of property that have appreciated in value since their purchase.