Don't Try to Deduct Gifts to the Frat Party Fund

And that sometimes means not going by your first source. So when donating a car, check the Kelley Blue Book, but if your car doesn't meet the criteria they lay out, you can't use their value. If the engine needs work or the brakes are stripped, for instance, you can't claim the Blue Book price. Likewise, though, if you've done a lot of work on the car you might be able to claim more than the Blue Book suggests.

If you're donating items that have appreciated in value -- like artwork, rare coins or other collectibles -- you can still claim a deduction for the fair market value. There is a catch, though.

Tangible items that have been held for more than a year must be donated to a charity that uses them for its main purpose in order for you to be able to deduct their fair market value.

Let's say you bought a painting from a local artist for $5,000. Now, several years later, the artist is the new "it" girl of the art world; that painting is worth $15,000 and you're looking to unload it. If you donate it to a museum, you can deduct the fair market value of $15,000. If you donate it to a college that hangs it in the library where students can study it, you can deduct the fair market value of $15,000.

But here's the catch: If you donate the painting to the Red Cross, which either hangs it in the lobby or sells it and uses the proceeds for new equipment, you can only deduct your cost basis. That's $5,000.

The charity must use your donated item to directly effect its mission in order for you to be able to deduct the fair market value of the item. In other words, if the museum promptly sells the painting, or if the college hangs it in the faculty lounge, technically you're only able to deduct your cost basis.

Perhaps somewhat surprisingly, though, the IRS allows for a "common sense" sort of loophole. If you reasonably believe that the donated item will be used in the charity's main purpose, you're able to deduct the fair market value no matter what the institution does with it. In order to substantiate the deduction, consider asking for a written statement of intended use from the charity.

For the Record

You'll need to keep some record of your charitable contributions to substantiate them in case of an audit, but in most cases the substantiation doesn't need to be filed with your return.

Keep a cancelled check or receipt from the charity as proof of each donation of less than $250. (That's not necessarily each item, but say, each bag of clothes or each trip to the charity.) For donations of $250 or more, you'll need to have a written acknowledgement that also notes any benefits or goods that you received in exchange.

If the claimed value of any single donation exceeds $500, you'll need to complete Form 8283 and file it with your 1040. And for donations that exceed $5,000 you'll need a written appraisal.

And in general (as with many other aspects of your tax return), if you're claiming something that you fear will raise an eyebrow or two at the IRS, attach an explanation.