Reader Eric finds that TurboTax is clairvoyance-enabled:
You have probably received many accolades as a CPA, but can you read minds? TurboTax apparently can.
Form 8283 asks taxpayers in columns E, F and H: (E) How they acquired an item, (F) The donors' cost basis, and (H) What valuation method they used. TurboTax's Deluxe Online Edition only asks when the item was donated and its FMV. When Form 8283 is printed, it shows that TurboTax has decided - via ESP - that every item was "purchased" (E), the cost basis was 2.5 times the donated value (F), and the valuation method for every item was "comparative sales." If TurboTax keeps up this pace, CPA's can spend the winter lounging on tropical islands.
On a serious note, do you think the cost-basis info matters? Would you bother finding a way to change it?
Basis does limit your deduction for donations of property in several situations:
- A gift of tangible personal property to a charitable donee whose use of the property is unrelated to its exempt purposes or functions. One example: a contribution of art to be auctioned off for charity.
- A contribution of property to a private foundation.
- A gift of a patent, copyright, trademark, trade name, trade secret, know-how, software, “similar property,” or “applications or registrations of such property.”
- Contributions of “taxidermy property”
Contribution deductions are also limited to basis for property held less that one year, or for ordinary income property.
Here TurboTax automates the kind of shorthand that busy preparers use every day of tax season to move their work along. A client says they donated clothes to the Salvation Army, and they reasonable documentation for what they gave. But sure enough, Form 8283 (you can see a reproduction of the relevant portion of the form if you click "read more") asks not only what the value of the donation is, but what it costs and where it came from. No preparer who wants to see the client again is going to demand that she go through her old credit card receipts to find out how much she paid for that blouse she bought in 1997.
So what does a preparer do? Well, you assume the client bought the item. Maybe they got it as a gift, but if they did they inherited the purchaser's basis. The preparer doesn't have to assume that the client is a shoplifter or anything.
The tax law limits your deduction for property donations to thier fair market value when it is less than basis. The tax preparer assumes that the blouse hasn't appreciated over ten years. So the cost must be higher than the deduction. The preparer says 2.5 times the value is close enough. How is it valued? Err... comparable sales! Here I think TurboTax defaults to the wrong generic instruction. Most property donations are old household items, and the Form 8283 instructions say:
Examples of entries to make include "Appraisal," "Thrift shop value” (for clothing or household items), "Catalog" (for stamp or coin collections), or "Comparable sales" (for real estate and other kinds of assets).
So TurboTax is trying to save a few steps for the preparer. But be careful - just because TurboTax defaults to something doesn't make it right, and the courts have already rejected the "blame TurboTax" defense. But don't be too disappointed that TurboTax doesn't really have ESP; clairvoyance is overrated anyway.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to