Dollars&Sense: Tax treasures in the closet

The calls usually start in March for Lee Weisman, co-owner of Fashion Avenue consignment shops in Edina and Wayzata. "What do you get for an Armani suit?" or, "What would you charge for a Prada handbag?"

Weisman knows that those callers aren't usually customers -- they're shoppers looking for maximum tax deductions. And there's no clear-cut answer to their questions. He needs to know if the Armani is 30 years old or two years old. "We usually give a price range," Weisman said.

It's easy to see why we're confused. In 2006 Congress tightened the rules for charitable deductions of donated clothing and household goods on a tax return. Deductible items must now be in "better" or "good" condition. Better means like-new condition; good indicates an item showing no noticeable wear or defects. What about the fair and the poor? Items in fair condition can be donated but not deducted. As for the poor, don't make your trash the charity's trash.

Many of our donated castoffs make us environmentally green but won't put the green in our pocketbooks. William Lewis, a CPA, tax preparer and financial planner in Lincoln, Neb., wants to change that. His self-published booklet, "Money for Your Used Clothing," lists the good and better values of more than 700 items.

He estimates that many taxpayers who were claiming between $250 and $400 for clothing and household donations should be able to legitimately deduct $2,000 to $3,000 for the same items.

"People underestimate the value of their donations because they have no resource to determine values," said Lewis. The IRS doesn't provide any values but in Publication 561 it reports that prices paid in consignment or thrift shops can be used as an indication of value. Lewis travels the country, checking prices in thrift and consignment shops, and updates the prices each year in his book. The 2007 edition for donations made in 2007 is currently available. The 2008 edition will be available in May.

Lewis says that his numbers may be more reliable than figures available on the Salvation Army website (www.satruck.com/valueguide.aspx) because he updates them annually. Some tax software, such as H&R Block's "DeductionPro," also provides values. Lewis, who has been publishing his booklet annually since the early 1990s, offers buyers two guarantees. He will refund the price paid if the buyer doesn't save at least $250 on taxes.

Still, fashionistas who plunk down $200 for a shirt or $800 for a suit will beg to differ with some of Lewis' valuations. The guy who paid $200 for a Theory sport shirt and the gal who paid $400 for Robert Clergerie pumps aren't going to be happy with the $14 value that Lewis puts on them. "For many items in a thrift shop, there is no price difference between what you get at Kohl's or Neiman Marcus," he said.

While that might be true for some items, that's a little like saying that your neighbor's Crown Vic and your BMW 3-series are the same. Unfortunately, taxpayers who want to claim more than $14 for their designer duds might have to go to a place such as Fashion Avenue to verify the value. Even then, consumers must be careful about condition. Fashion Avenue's clothing and accessories show little or no wear. Items that show wear may have no deductible value.

If you've already underestimated 2007 donations, make a change in 2008. If the value of the donations is more than $500, Form 8283 must be filed with your tax return. As long as the value of donated items is under $5,000, an outside appraisal is not required. To see a copy of the form, Google "IRS Form 8283" or get a copy at a public library.

To make the most of charitable donations, Lewis recommends keeping track of dates that you received or bought items, the amount paid, the names and addresses of the charity receiving the donations, a snapshot or video of the donations as a visual record, and a signed and dated receipt for donations.

Lewis said that even if a taxpayer puts a higher value on items than in tax software or his booklet, it doesn't mean that it's too high. It means that you need to show how you justified such a value. "The IRS is looking for documentation," Lewis said. If you checked prices at three local consignment stores and made a record of prices and dates checked, you have a record to show the IRS.