As the bidding goes up on an item at a charity auction, so does the amount of money the charity will collect to further its mission -- and so does the potential tax deduction for the winning bidder. People who bid at charity auctions, as well as those who donate items to be auctioned off, should be familiar with the tax rules that dictate whether they can claim a deduction, and how much they can deduct.
Fair Market Value
According to IRS rules, donors who win items at charity auctions can claim a tax deduction for their charitable contribution only for the amount paid for the item in excess of its fair market value. For example, say a bidder wins a year's membership at an exclusive golf club where annual memberships cost $4,000. If the bidder paid $6,000, he can legally deduct $2,000 as a charitable contribution on his taxes.
Winning bidders must be able to prove that they paid more for the item than its fair market value. Charities often provide the fair market values of items for bid at auctions. If the winning bidder believes the charity's estimate is correct, and she paid more than the published value, a tax-deduction can be taken on the additional purchase amount. If the charity did not provide an estimated fair market value, it is the winning bidder's responsibility to estimate the value properly to substantiate her deduction, if taken. She also has to be able to prove to the IRS how she determined the amount.
Record-Keeping and Tax Filing
IRS rules also require that bidders receive a written acknowledgement from the charity for contributions valued at more than $250. In all cases, the winning bidder should keep a copy of documents -- a check, bank statement or credit card statement, for example -- that show how much was paid to what organization and when. Finally, the charitable contribution is deductible only if the winning bidder itemizes deductions on IRS Form 1040, Schedule A.
Giving Goods to Be Auctioned
Someone who provides items for charities to sell at auction can claim a deduction -- but that deduction is neither the fair market value nor the winning bid amount. The law limits a donor's charitable deduction to the donor's "tax basis" -- essentially, the original amount the donor paid for for the item. According to the tax code, when a donor contributes tangible personal property to a charity that is put to an unrelated use -- meaning one that is not directly related to the charity's tax-exempt purposes or function -- the donor's contribution is limited to his tax basis in the contributed property.
For example, auctioning off donated furniture is considered "unrelated," even if the sale raises money for the charity to use in its programs. But if the furniture had been donated to the charity for its own use in carrying out its mission, then the donor could claim a deduction for fair market value.
A donor who gives goods worth more than $250 must receive a written receipt from the charity acknowledging the donation. A donation of a tangible good worth more than $5,000 must be professionally appraised, if a tax deduction is taken. Gifts of services by individuals typically do not qualify for deductions.
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