Got Junk? Donate it! Pay less in taxes!

It is that time of year. You are overwhelmed with stuff and likely to buy and receive more with the upcoming holidays. You likely have more than you need, certainly more than you use. Why not do your housecleaning chores now so you can pay less in taxes next year?

Donating clothing and household goods needs to be done the right way so that you can qualify for and keep your tax deductions.

When you donate clothing and household items, you need to know:

1)      Charities that qualify to receive clothing and household items

2)      Types of clothing and household items you can give to a charity

3)      How to value the deductions for clothing and household items

4)      Records you need

5)      What happens on your tax return

6)      How to escape accuracy-related penalties

The following discussion focuses specifically on donations of clothing and household items.

Does my charity qualify?

How do you decide which charity gets your clothing and household items? That’s easy. You want to give property to charities that qualify your property donations as charitable deductions for tax purposes. Here are the types of charities that qualify:

  • Federal, state and local governments, if your contributions are solely for public purposes.
  • Churches, synagogues, temples, mosques, and other religious organizations
  • Most nonprofit educations organizations, such as the Boy Scouts of America, Girl Scouts of America, colleges, and museums
  • Nonprofit hospitals and medical research organizations
  • Fraternal societies operating under the lodge system
  • Cemeteries
  • War veterans’ groups

If you are uncertain you can check on a specific charity’s status with the easy IRS search tool found at

https://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check

Although you can deduct donations to your church, you likely won’t find your church on the IRS list because churches are not required to file Form 990.

You can also call the IRS directly at 1-877-829-5500.

Rules of the Road

Lawmakers enacted special rules for various types of property donations. With donations of clothing and household items, you face two special rules:

1)      Overall rule. You can claim deductions for clothing and household items that are in good, used condition or better.

2)      Exception. You can take a deduction for a contribution of an item of clothing or a household item that is not in good used condition or better if you (a) deduct more than $500 for it and (b) include a qualified appraisal of it with your tax return.

Figuring the Deduction

You deduct the fair market value of the clothing and household items that you donate. You might be thinking, how do I determine fair market value? The law says that the “fair market value is the price at which property would change hands between a willing buyer and a willing seller” Since it’s unlikely that you are going to do your own research on what’s fair value, consider using the following resources for estimates of fair market values on good used items:

https://www.goodwill.org/wp-content/uploads/2010/12/Donation_Valuation_Guide.pdf

  • ItsDeductible by Turbo Tax (no dollar fee but requires an emails address)

https://turbotax.intuit.com/personal-taxes/itsdeductible/

Record Keeping: What Records do I Need?

You need good records to prepare your tax return so you can pay less in taxes. You also need those records to protect yourself in the event of an IRS audit.

When you contribute clothing and household items, the records you need for the year depend on the value of your deductions. The IRS has the following four categories:

  • Claimed noncash contributions less than $250
  • Claimed noncash contributions at least $250 but not more than $500
  • Claimed noncash contributions over $500 but not more than $5,000
  • Claimed noncash contributions of more than $5,000 for an individual item or group of similar items

Less than $250. Let’s say this year you decide to donate a coffee table, a toaster oven and two chairs, together valued at $225 (under the $250 threshold). When you donate them, you must get and keep a receipt from the charitable organizations showing

  • The name of the charity,
  • The date and location of your contribution, and
  • A reasonable detailed description of the property.

In addition to the information on the receipt from the charity, your written records that prove the $225 deduction should include the fair market value of the property and the method used to determine the value.

$250 to $500.

Let’s say the coffee table, toaster oven, and two chairs had a fair market value of $300 (over the $250 threshold) rather that $225. Relax; simply keep the records as above and you meet the rules for the $300 deduction.

The category for the $250 or more contains the additional requirement that the donee acknowledge whether it provided you any goods or services in return for your donations of $250 or more. With donations of the household items described, the receipt gives the necessary details, and the charity doesn’t have to give you any additional documentation.

Over $500 to $5,000. If your total noncash contributions fall into this category and all of the individual items are valued at $500 or less, you simply follow the rules above. But:

1)      If you claim a deduction of more than $500 for a single item in the over $500 to $5,000 group, your written records must include for the more-than-$500 item or items (1) the approximate date acquired, (2) how acquired (purchase, gift) and (3) your cost of adjusted basis.

2)      If you claim a deduction of more than $500 for an item of clothing or household item that is used and not in good condition or better, you need to keep a copy of the qualified appraisal for your records and also need to attach a copy of that appraisal to your tax return.

Over $5,000. If you claim a deduction of over $5,000 for a noncash charitable contribution of one item or a group of similar items, you must obtain a qualified appraisal of such item or group and attach it to your tax return.

Your Tax Return

Your noncash contributions are reported on line 17, Schedule A, Itemized Deductions on your Form 1040. In addition, if your claimed deductions for noncash contributions are more than $500, you also must file IRS Form 8283 with that tax return.

Takeaways

Donating your used clothing and household items to a worthy charity does three great things:

  • Gives you a tax deductions so you pay less in taxes
  • Helps a worthy charity
  • Clean the house of some junk and used items

Make this deduction easy. Check out the online resources for identifying the fair market value of the items you are contributing.

Make sure you get a receipt from the charity. Don’t drop your items at the unattended drop box and walk away without a signed receipt. The signed receipt with a descriptions of the items donated gives you great proof.

Saving money on your tax bill can be a win-win opportunity for you and your charity. With just a little bit of planning and record keeping, you can pay yourself a hefty hourly rate for the relatively little effort this deduction takes.

Contact Kasperek & Co. Accountants if you have questions!