From Clutter to Contribution: Making the Most of Your Donations at Tax Time
GUEST BLOGGER: Karen Mason, The Approachable Accountant
At this time of year, local thrift stores are very busy accepting donations, as taxpayers scramble to maximize their deductions before the end of the year. This year, it’s an exciting time for tax preparers as we take more continuing education than usual to learn the ins-and-outs of the Tax Cuts & Jobs Act. There are many new forms, rules, and thresholds that will leave taxpayers scratching their heads.
Not much has changed about the deductibility of charitable contributions, but the existing laws are frequently misunderstood. The information presented here is for general information. I am a tax preparer, but not your tax preparer. Only your tax preparer can give you specific advice about your tax position.
WILL I STILL ITEMIZE UNDER THE TAX CUTS & JOBS ACT?
The new standard deduction is $12,000 for Single taxpayers, and $24,000 for married filing jointly. If you own an average home in the DC area, there’s a good chance that your mortgage interest, along with state income, real estate, and personal property taxes will take you over that threshold. If those things get you close to the mark, generally, your tax preparer will enter information about all your deductible expenses and contributions to see if you exceed the standard deduction.
If your interest and taxes do not take you over the standard deduction, your charitable contributions may get you there, especially if you called The Organizing Mentors to help you reclaim your space, mentally and physically!
In my experience, most people undervalue their charitable contributions on their tax returns!
WHAT IS THE VALUE OF MY DONATIONS?
When you buy something new (including food) and donate it to the local food bank or buy gifts for someone off an “angel tree” at Christmas, the deductible value of those items is printed clearly on the receipt. You can include the tax on those purchases as part of your contribution. HOWEVER, if you donate something new that was purchased in a prior year, you must use the value of the item in the year you donate it.
When you donate most clothing, books, and household goods, it is up to you to assess the value of those items. This is where many taxpayers leave money on the table. People who donate clothing value their contributions quite differently, from as little as $5 to as much as $25 per bag, and they almost always undervalue their donations.
The Salvation Army donation guide, available at https://satruck.org/Home/DonationValueGuide, offers suggested low and high values for commonly donated clothing and household goods. These values are based on “thrift store value,” or the amount they will receive as a result of selling the items you donate. You are asked to use that range to determine the value of the specific items you donate. Please note that your donations must be in at least good condition to be deductible.
As an example, 4 pairs of men’s shorts and 5 men’s T-shirts would only half fill a bag, but the combined low-end value is $31. If those same items were new or designer, the value could go as high as $100.
WHAT ABOUT CARS, ART, ANTIQUES & COLLECTIBLES?
Determining the Fair Market Value (FMV) of these donations is more complicated and may require an appraisal. I strongly recommend consulting a tax professional before you donate high-value items, particularly art.
For cars, you can generally use online calculators to determine the value, but you must be realistic about the condition of the vehicle and use the private-party sale value. Some organizations sell donated cars at auction and provide you with a receipt in the amount realized from the sale. Because there are so many variables in play, this can work in your favor or against you.
You can determine the deductible value of art, antiques and collectibles that are of modest value using online reference materials and price guides. Generally, items with a value of more than $5,000 must be appraised. The details can be found in IRS Publication 561, which also includes information about donating stocks, annuities, and other property.
WHERE SHOULD I DONATE?
Donations of any kind are only deductible if the recipient is a qualifying charity. You may not deduct items given directly to a family in need, or to a political organization. The IRS provides a charitable organization search tool to validate your choice of charity at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.
In addition to the big-name charities, like the Salvation Army, Goodwill, and Habitat for Humanity, there are many qualifying charities on the local level. Women Giving Back, Blue Ridge Hospice, Mobile Hope, the Inova Hospital Ladies Board, Hope’s Treasure, and Blossom & Bloom are just a few of the organizations and thrift stores that accept eligible charitable contributions.
WHAT RECORDS DO I NEED TO KEEP?
The IRS requires that you obtain and keep receipts for noncash donations of more than $250, and you must complete Form 8283 with your tax return if the total of all your noncash donations for the year is more than $500.
You must keep a record of all cash donations, regardless of the amount. Specific recordkeeping requirements may vary depending on how you donated. For instance, your phone bill substantiates any donations via text message.
And here’s the one that everyone forgets – MILEAGE!
WHAT ELSE DO I NEED TO KNOW?
When you make all those trips to the thrift store to drop off donations, that mileage is deductible at a special rate! (The same holds true for volunteer miles, subject to a few rules.)
If 2018 wasn’t your year, and you expect to make more money next year, you may want to save your donations until January 2 to get more benefit from the deductions.
There are special rules for self-created items you donate, like artwork, quilts, and handmade furniture or toys. In most cases, you will not be able to deduct the FMV.
Generally, donated work/time (volunteer work) is not deductible as an in-kind donation unless you are providing a specialized service.
For the most part, charitable contributions to eligible organizations are limited to 50% of income.
Making mistakes on your tax return can be costly. Many taxpayers miss out on important deductions, or take deductions based on erroneous information that cause big trouble with the IRS. I strongly encourage you to consult with a qualified tax preparer, especially if you have bought or sold a home, own rental property, lost your job, started a business, had significant charitable contributions or medical expenses, or had a change in your family status, such as marriage or divorce, birth of a child, or assumed responsibility for a parent’s care.
Karen Mason is The Approachable Accountant, offering bookkeeping, payroll, and tax preparation services with a heart for small business. Based in Leesburg, the firm specializes in tax preparation for individuals, sole proprietorships and microbusinesses. She holds a B.S. in Accounting from Shepherd University and is currently pursuing an M.A. in Entrepreneurship.