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A US resident donates a used book to a charity. He wants to deduct the value of the book on his tax return. He observes that a very similar book can be bought for $30 at a local used bookstore. The same bookstore will buy the used book for $10.

Based upon these prices, I'm thinking the person should be entitled to a $20 tax deduction for the used book. Am I correct?

3 Answers 3

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The simplest answer is to find evidence of what that product, used, in that condition, commonly sells for. The best tool I know of for that purpose is actually eBay's option to show you "completed sales", which is direct evidence of what someone was actually willing to pay. You may have to dig a bit, and if there's a range of prices you need to have at least some reason for picking a particular price in that range, but it's a lot more defensible that just guessing.

In fact, there used to be a commercial product which used exactly this approach to father information in what second-hand donations were worth for tax purposes. That worked by category rather than trying to match the item exactly, making it more statistically valid but less able to reflect subtleties in condition or popularity of an individual variant... but as far as I know,the tax folks was pretty content with its suggestions.

Of course that only works for things someone thought to post on eBay and someone else was willing to buy at or above the starting price. But the only other approach I have is lots of hand-waving best-guess approximation and being willing to accept that the IRS may disagree with you. An audit isn't the end of the world, if you haven't been deliberately trying to cheat; the worst that happens is that you owe a bit more tax plus interest and a small penalty.

Late addition: In some rare cases, the charity may be willing to give you a receipt which states what the donation was worth to them. One example of this is donating a car to be sold to benefit the charity; they may send you a letter telling you how much they were able to sell it for, and that can be used as evidence of the value of the donation. (Last time I did this, they were able to get a better price for it than I would have dared estimate!)

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If it would sell on eBay or at the bookstore for $30, then that's the FMV and you would use that amount for your tax return. The IRS has a nice guide for determining FMV of donated items if you want a more thorough read. This table from the link addresses a good bit of the considerations succinctly:

Table 1. Factors That Affect FMV

IF the factor you are considering is... THEN you should ask these questions...
cost or selling price Was the purchase or sale of the property reasonably close to the date of contribution?
Was any increase or decrease in value, as compared to your cost, at a reasonable rate?
Do the terms of purchase or sale limit what can be done with the property?
Was there an arm's-length offer to buy the property close to the valuation date?
sales of comparable properties How similar is the property sold to the property donated?
How close is the date of sale to the valuation date?
Was the sale at arm's-length?
What was the condition of the market at the time of sale?
replacement cost What would it cost to replace the donated property?
Is there a reasonable relationship between replacement cost and FMV?
Is the supply of the donated property more or less than the demand for it?
opinions of experts Is the expert knowledgeable and competent?
Is the opinion thorough and supported by facts and experience?
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In another jurisdiction they have a reasonable rule for donations from businesses (and as the rule is reasonable, the USA might have the same rule): If a business buys an item for $X, then has tax writeoffs of $Y reducing their profits, then the value of the item is not more than $X - $y. You buy a computer for $1000, you deduct $900 as a business expense from taxes, it's not worth more than $100. You can't say it's worth $300, even if it is, because then your tax writeoffs would have been too high.

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