So, you donated six bags of clothes to Goodwill and gave your used washer and dryer to the Salvation Army. Now you hope to claim the donations as a deduction. There are a few things to know before your tax preparer reports your Gifts to Charity on your federal income tax return.
First, donations must be made to a qualified charity in order to be deductible. Gifts to individuals, political organizations or candidates are not deductible. A qualified charity that is designated as a non-profit organization or a 501(c)(3) must not benefit or have as a focus any private shareholder or individual. Qualified charities must also be up-to-date on their information reports to the IRS that show that their profits are being used for their tax-exempt purposes. To check the status of a charity the IRS now provides a one-stop online tool called Exempt Organizations Select Check (EO Select Check).
In order to deduct a charitable contribution, you must first itemize deductions on Form 1040, Schedule A - Itemized Deductions. It is important to have documentation that shows the dollar amount of all claimed qualified donations and the specific organization to which the donation was made. Noncash contributions should have information or may even need an appraisal that reflects the fair market value of the donation at the time it was given.
If you happened to get something in return for your donation, the value of what you received must be subtracted from the claimed donation amount. You may only deduct the amount that exceeds the fair market value of the benefit received. Many taxpayers miss this point. For example, let’s say you participated in a silent auction fundraiser and you “won” with the highest bid, and the item you received was worth more than the amount you paid for it. You may only deduct the difference between what you paid for the item and the fair market value of the item. This includes benefits you received like merchandise, meals, and tickets to events or goods and services.
If you donate property instead of cash, the deductible amount is limited to the donated item’s fair market value or the price a seller would receive if the property sold on the open market. Many taxpayers struggle with determining the value of things like used clothing and household items. The IRS requires that the items be in good condition or better, and has an online resource to help taxpayers determine the fair market value of items. Technically each item, including a pair of socks, is supposed to be identified on a worksheet along with its value in order to calculate the actual value of a donation. Many taxpayers simply take their chances and submit only a receipt from a recognized charitable organization that lists the date and a general description of what is donated, such as “2 boxes of clothing”. If a taxpayer is audited, they must provide proof for each donation. Cars, boats and other types of property donations are subject to additional rules.
Whether you donate cash or goods, if the amount of any specific donation is $250 or more, you must submit a written statement from the charity confirming the details. That statement must report the same donation amount that you’re claiming, and a description of any property that was given. It must also state whether any goods or services were received in exchange for the donation.
If you make total noncash charitable contributions that exceed $500 for the year, you’ll need to fill out another form, Form 8283, that requires more details and more proof of value. The type of records that a taxpayer must keep depends upon the amount and type of donation.
Here are examples of charitable contributions:
- Money or property given to churches, synagogues and other religious organizations
- Gifts to nonprofit schools and hospitals
- Gifts to qualified charities such as The Salvation Army, Boy Scouts or Girl Scouts of America, CARE and Goodwill Industries
- Donations to War Veterans groups
- Out-of-pocket expenses when you serve a qualified organization as a volunteer
Here are items that are NOT deductible as charitable contributions:
- The value of your time or services
- The value of blood given to a blood bank (yes, it has been tried)
- Cost of raffle, bingo, or lottery tickets
- Dues, fees or bills paid to country clubs, lodges or fraternal orders
- Money or property to groups that lobby for law changes
- Donations to candidates for public office or political groups
If you have any questions about deducting charitable donations from your federal income tax, please contact one of our tax preparation experts at McRuer CPAs for more information.
Find out more about deducting Medical and Dental Expenses in our blog.