If you’re like most people I know, you give away at least a couple of bags of “stuff” each year—clothes, CDs, books and such. You give, of course, for all the right reasons: being charitable is part of our shared ethical values, and you can support causes you care about.

But consider something else. If you itemize your deductions, making a charitable contribution reduces your taxes. Would you really have gone to all that trouble without the subsidy? Or would at least some of the stuff have gone in the trash? I think we know the answer.

The tax deduction, of course, involves some rules. Do it right or lose the deduction. And, if you are not careful in choosing where you give the stuff, you can lose that warm and fuzzy feeling, too.

Stumbling Over the Book

Two parts of the IRS rules for non-cash charitable contributions often trip people.

The first involves how much you can deduct. You can only deduct the lower of what an item cost you, or what it is worth. The notion of “cost” should be obvious. (Special rules, too complicated to discuss here, govern what figure to substitute if the item was a gift or bequest.)

“Worth,” properly called fair market value, is where many people get in trouble. The IRS defines fair market value as the price “...at which the property would change hands between a willing buyer and a willing seller when the former is not under compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.” That is an elegant theory, but often difficult to apply in practice. Any statement of fair market value is an estimate. They are almost always based on what similar items in similar condition and location have sold for.

The accepted basis for comparison of used clothing and household goods is thrift shop value: how it will, or would be, priced in the store. If you have ever bought costumes or props at a thrift shop, you know that is not very much. Other than your own experience, there are two useful outside references. The Salvation Army puts out a sheet listing how they typically price contributed items. The maker of a software product, called “It’s Deductible,” conducts an annual survey of thrift shops across the country to determine values. Neither is officially authoritative, but IRS agents regularly use both in auditing tax returns.

The second tripwire involves documentation. Any contribution of $250 or more must be substantiated by a receipt from the charity. If you cannot provide that when requested by the IRS, you will lose the deduction, no matter what other documentation you have. And the larger the amount, the more detail you should be able to provide. Do not just list “five boxes of clothes” with a dollar value scrawled next to it. Take a few minutes to write out a list, value each item or group and attach the list to your receipt.

Where We Give

Most people will only write a check to a charity involving a cause they support, be it live theatre, tsunami relief or cancer research. Many people go further. They might look at a charity’s financial track record, such as what part of its money goes to the charitable program, and what part to administration and fundraising. They might also consider the organization’s overall mission and affiliations; abortion advocates would probably hesitate to support Catholic hospitals, and few Jews would contribute to evangelical Christian groups.

But few people apply these same criteria for non-cash contributions. I do not understand why. The Salvation Army does great social services work, but its adherents believe people like me will burn in hell. Yet every year, gay Jews like me give used clothes to the Salvation Army, and hand me the receipt when I prepare their tax returns.

Maybe it is laziness. People know a few names, and a few others actively solicit. If you are giving away a sofa that won’t fit in your Toyota, pick-up service is important. Maybe some people think items of small value do not much matter.

Perhaps because of this thinking (or non-thinking), the field seems to attract dubious charities. I have myself looked at the tax returns for some organizations that actively solicit household contributions here, and saw relatively high administration and fund-raising costs compared to charitable program spending. Not enough to be illegal or visibly improper, but enough to send me elsewhere.

The Chicago Tribune ran lengthy articles in January, 2004, about Gaia (the organization whose green drop-off bins are highly visible around Lakeview) and its leadership. The articles were not flattering. The Tribune reported that money moves around through a shadowy network of affiliated entities, some for-profit, some not-for-profit, and that the leaders of the European-based organization were under indictment for embezzlement and tax evasion in Denmark and for money-laundering in Belgium.

Drop-off bins are a poor way to contribute, in any case, since you do not get the required tax receipt. They are also often vandalized and have trash dumped into them, spoiling the contributions.

Sorting It Out

If you feel like wading through nonprofits’ financial data, you can look it up on line. Tax returns are public inspection documents and most are available at www.guidestar.org. Illinois non-profits file annual reports with the state attorney general, including their federal tax returns and audited financial statements. Reports filed after March 31, 2004, can be viewed on-line at www.illinoisattorneygeneral.gov. But even I don’t do that.

The Tribune published a follow-up article on Feb. 23, 2004 which listed about 20 organizations they felt could be recommended to their readers, based on the entities’ finances and practices. This could be a good starting point, though you would still want to consider their missions and religious affiliations.

The best way for many people will be to start close to home. If you are involved with a church or synagogue or community service organization, ask around there. Many have clothing programs, often informal or seasonal (e.g. before winter or back-to-school).

Otherwise, I suggest you take the stuff in person to a resale shop directly operated by an institution known in your community, such as a shelter or clinic or hospital. That way you know where the value of your contribution is going. Stick around, too—shop, and talk to the volunteers who help out. You might find something you like.

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.

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