Why Did Duncan Bass Make 172 Trips to Goodwill and the Salvation Army?Tax Planning
You may remember Duncan Bass from last month’s article: Court Denies Clothing Donations to Goodwill and the Salvation Army.
You also may remember that Mr. Bass made the 172 trips to Goodwill and the Salvation Army to keep each receipt below $250. That was smart thinking on his part.
But Mr. Bass lost his deductions because he ran afoul of the appraisal rule that applied to his aggregate clothing donations.
In this article, we help you donate clothing and household goods 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 these things:
- Charities that qualify to receive clothing and household items
- Types of clothing and household items you can give to a charity
- How to value the deductions for clothing and household items
- Records you need
- What happens on your tax return
- How to escape accuracy-related penalties
The following discussion focuses specifically on donations of clothing and household items—not cash, not vehicles, and not the facade of your home.
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 tax-deductible charitable donations for tax purposes. Here are the charities that can do that:
- Federal, state, and local governments, if your contribution is solely for public purposes
- Churches, synagogues, temples, mosques, and other religious organizations
- Most non-profit educational organizations, such as the Boy Scouts of America, Girl Scouts of America, colleges, and museums
- Non-profit hospitals and medical research organizations
- Fraternal societies operating under the lodge system
- War veterans’ groups
If you are uncertain, you can check on a specific charity’s status using the IRS’s Tax Exempt Organization Search.
Although you can deduct donations to your church, you likely won’t find your church on the IRS list because it is not required to file Form 990.
If you don’t like the search engine or its results and would like an answer, you can call the IRS directly at 1-877-829-5500.
Rules of the Road
Lawmakers enacted special rules for various types of property donations. In this article, we discuss donations of clothing and household items such as furniture, furnishings, electronics, appliances, linens, and other similar items.
With donations of clothing and household items, you face two special rules:
- Overall rule. You can claim deductions for clothing and household items that are in good used condition or better.
- 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
If you itemize your deductions, 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 original research on what’s fair value, consider using the following resources for estimates of fair market values:
- The Salvation Army (free) https://satruck.org/Home/DonationValueGuide
- Charity Deductions ($29.95) http://charitydeductions.com/
- Goodwill (free) https://www.goodwill.org/wp-content/uploads/2020/03/donation_valuation_guide.pdf
- ItsDeductible by TurboTax (no dollar fee but requires an email 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 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 non-cash contributions of less than $250
- Claimed non-cash contributions of at least $250 but not more than $500
- Claimed non-cash contributions of over $500 but not more than $5,000
- Claimed deduction 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 organization showing
- the name of the charity,
- the date and location of your contribution, and
- a reasonably 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 than $225.
If you make a single charitable contribution of $250 or more, you must obtain a written acknowledgment from the charitable organization to substantiate your deduction. This is often called a “contemporaneous written acknowledgment.”
- It must confirm the amount of cash or a description of any property contributed by you.
- It must state whether the charity provided to you any goods or services in exchange for the gift. If so, it must provide a description and a good faith estimate of the value of those goods or services.
- It must state that the only benefit you received was an intangible religious benefit, if that was the case.
If you make several smaller gifts to the same charity throughout the year, you need an acknowledgment only if any single gift is $250 or more.
Over $500 to $5,000. If your total non-cash contributions fall into this category and all the individual items are valued at $500 or less, you simply follow the rules above. But,
- 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 or adjusted basis; and
- 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 non-cash charitable contribution of one item or a group of similar items, you must obtain a qualified appraisal of such item or group of items and attach it to your tax return.
Key point. Note that a “group of similar items” can trigger the appraisal requirement. That’s what happened to Mr. Bass. His 172 trips were for clothing donations totaling $13,852 and $11,594 for the two years before the court— well over the $5,000 appraisal requirement for the group.
Your Tax Return
You report your non-cash contributions on line 12, Schedule A, Itemized Deductions on your Form 1040. In addition, if your claimed deductions for non-cash contributions are more than $500, you also must file IRS Form 8283 with that tax return.
Donating your used clothing and household items to a worthy charity does three great things:
- Gives you a tax deduction so you pay less in taxes
- Helps a worthy charity
- Cleans out the junk and used items from your house
Make this deduction easy. Check out the online resources listed in this article 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 description 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 planning and record keeping, you can pay yourself a hefty hourly rate for the relatively little effort this deduction takes.