Sizing Up a Charitable Deduction for Clothing: When is an Appraisal Required?

If you’re cleaning out your closet, you may come across clothing in perfectly good shape that you don’t wear any longer or have never worn. You can donate this clothing to charity and claim a deduction on your personal return if you itemize. However, as shown in a new case, Bass, TC Memo 2023-41, 3/27/23, you must obtain an independent appraisal if the total value of your gifts exceeds an annual threshold.

Background: The tax rules for deducting monetary gifts or cash-equivalents are relatively straightforward. The deductible amount is generally equal to the amount you donated—period.

But things get a little trickier if you donate property to a charitable organization. If the property has appreciated in value, you can write off the current fair market value of the property if you’ve owned it for longer than one year. Otherwise, the amount of the deduction is generally limited to your initial cost of the property.

It’s a different story for property that has depreciated in value like most items of clothing. In that case, your deduction is based on the fair market value of the property if it’s in good condition. The IRS doesn’t specify amounts so you can rely on guidelines provided by organizations like Goodwill and the Salvation Army. Make sure that all contributions are documented and obtain detailed receipts.

For any charitable contribution of property exceeding $500, you must include with your tax return for the year the deduction is claimed a description of the property contributed. If the property is valued above $5,000, you must also obtain an independent appraisal and attach it to your return,

Facts of the new case: In 2017, the taxpayer, a resident of North Carolina, donated men’s, women’s and children’s clothing and various non-clothing items to Goodwill and the Salvation Army. He made 173 separate trips to Goodwill and the Salvation Army, often multiple times on the same day to avoid, in his viewpoint, the need to have the items appraised.

For each trip, a Goodwill or Salvation Army worker provided the taxpayer with a donation acknowledgment receipt. In turn, he filled each one out, listing the items donated and their fair market values.

The Goodwill receipts reflect donated items totaling $18,837, consisting of clothing totaling $13,852 and other household items. The Salvation Army receipts reflect donated items totaling $11,779, consisting of clothing totaling $11,594 and a handful of household items. The total deduction for clothing alone in 2017 came to $25,651.

The taxpayer attached two Forms 8283 to his return, but didn’t obtain a written appraisal. He claimed that he didn’t need one because he did not donate any single item worth over $5,000. But the Tax Court affirmed that all similar donated property must be aggregated for this purpose. Since the taxpayer donated over $5,000 in clothing to the two charitable organizations, a qualified appraisal is required. Result: The taxpayer’s entire deduction for property was is denied.

Moral of the story: Adhere strictly to the substantiation rules for charitable donations. A deduction worth thousands of tax dollars could be at stake.