Last week I determined that if I wanted to create an impact on my portfolio and my taxes this upcoming year, I needed to organize my closets, sell unwanted items, invest my cash returns in the stock market, and determine my capital gains for taxable income in 2006. While this restructuring is designed to lighten my work load, I discovered that my work has just begun. Whether I decide to sell or donate my unwanted items, I need to find the cost of these items at fair market value. If I discover that these items are "collectibles," I might end up with more headaches than money.

A collectible is an item deemed worth collecting. Period. Ten-year-old used bath towels inherited from your favorite relative are not collectibles. Do as your beloved ancestor would do - tear them up and use them as rags. However, items such as stamps, coins, artwork, books, land, buildings, clothing, jewelry, and even nonpublicly traded stocks and securities can be deemed collectibles. These latter items require some thought and an appraisal before we can let them go. Additionally, the IRS requires at least an appraisal and some honesty...

I'm going to deal with donations first, since many of us still seem riveted by victims of disaster. Additionally, many of us harbor a secret desire to become immortal, and donations help that goal along. Here's a sample of what the IRS has to say about donations:

"?if you give books to three schools, and you deduct $2,000, $2,500, and $900, respectively, your claimed deduction is more than $5,000 for these books. You must get a qualified appraisal of the books and for each school you must attach a fully completed appraisal summary (Section B of Form 8283) to your tax return."

Basically, the IRS wants us to break our donations down into monetary categories, beginning at the $5,000 mark. However, the IRS also wants us to break down the categories by type of donation, and then apply the monetary factor again. To be accurate, the best thing to do is check the IRS donation index.

For instance, if we want to sell what we think is a valuable piece of jewelry, we must take the jewelry to an appraiser first. But, we can't take the jewerly to just any appraiser. The person must be a specialized jewelry appraiser. The appraiser then writes down a description, including the cut, setting, flaws, and whether the item is in fashion or not. This is the tricky part. If that two-hundred-year-old cameo isn't in fashion, that doesn't mean it's not worth a mint, so don't alter the setting, etc. until you receive a second opinion. With that in mind, sentimental value doesn't count in the appraisal, but the IRS does allow for "celebrity status." In other words, if that cartoon watch was owned by Mick Jagger, then its value might increase.

Another example includes used clothing. These items, according to the IRS, are usually worth far less than the price we paid for them (they fit in the ten-year-old used towel category). However, furs or expensive gowns might require an appraisal. If you own a fur that was defaced with red paint by an extremist animal lover in the 1960s, you might find that this fur isn't totally useless. Contact a few musuems to see if they're interested in what was considered a political item at that time. If so, your damaged fur might escalate in value (good luck).

Donation rules apply to stocks and securities, also. If we claim a deduction of more than $5,000 for a donation of publicly traded stocks and securities, we don't need a qualified appraisal or an appraisal summary. However, these items must be listed on a stock exchange where quotes are published daily, or they must be regularly traded in a "national or regional over-the-counter market" where quotes are available. Shares of an open-end investment company (mutual fund) must also have quotes published on a daily basis in a generally circulated newspaper throughout the U.S. (like the Wall St. Journal or your local city news). Any stock purchased through BUYandHOLD fits these requirements. These donations must be reported in Section A, Form 8283. If you have questions, you can find more information here.

Donations are one thing and sales are another. Collectible items are capital assets, and any gain or loss from their sale or exchange is considered an ordinary capital gain or loss. How about that. However, if you consider yourself a dealer in stamps, coins, jewelry, etc., then the amount received in a sale is considered ordinary business income. Don't ignore this last bit of information, because you may become hooked on celebrity cartoon watches when you discover how much that one owned by Mick Jagger is worth.

Be aware that capital assets are also required to be listed in school financial papers. So if Billy or Bobby-Joe wants to head to college in three years, you might sell that capital asset now and re-invest the money in a Coverdell IRA instead. Also remember that collectibles are a lot like the stock market. One year that Norman Rockwell plate may be worth $500, and two years later it may plummet to $50. As with any market, a "buy low, sell high" mentality works wonders.

Until next week,
Linda Goin