Charitable Donations and Tax Deductions

Are you moving or cleaning out the home of a loved one? Feeling overwhelmed by the sheer volume of unwanted stuff you need to get rid of? Worry no more, the Estate Pros have you covered!

Estate Sales are an excellent option for decluttering, downsizing and cleaning out a home but in some instances an alternate solution is necessary. That’s where a donation and clean out service may come into play. If you’re someone who loves to give back to your community and support causes close to your heart then a household donation may just be your best bet. Not only will a donation and clean out solve your downsize problem but you’ll be glad to know that your generosity may also provide some tax benefits if you qualify.

Charitable giving not only helps others in your community, but as a taxpayer, your charitable contribution may count towards a tax deduction. Deducting donations you’ve made to a qualified charity on your tax return may reduce your taxable income.

Tax Deductions for Charitable Donations

So what is a charitable donation? A charitable donation, or charitable contribution, is a cash or non-cash (property) gift made to a qualified 501(c)(3) tax-exempt nonprofit organization. The donor may receive a reduction on their taxable income through their tax return as a result of their contribution. Otherwise, donors don’t receive anything of value from the charity in return for their donation.

Your non-cash donations of clothing, household goods, etc that are in “good” condition or better are entitled to a tax deduction, according to Federal law. The IRS requires that all charitable donations be itemized and valued.

Standard Deduction:

The standard tax deduction is the most widely used type of deduction taxpayers take advantage of. It is a fixed dollar amount that reduces the income you’re taxed on. The standard deduction:

• Permits a tax deduction including when you have no expenses that qualify for claiming itemized deductions
• Eliminates the need for itemizing deductions

The standard deduction amount will vary each year based on IRS guidelines and your filing status.

Itemized Deduction:

Itemized deductions work differently than the standard deduction but also reduce your Adjusted Gross Income. The standard deduction is a standard (or fixed) amount. Whereas, the itemized deduction is a dollar-for-dollar deduction, and the amount will be different for each taxpayer. The itemized tax deduction amount is determined by adding all applicable deductions and subtracting the sum from your adjusted gross income.

Itemizing your deductions on your tax return, as opposed to, taking the standard deduction will allow you to claim charitable donations on your taxes. When filing your taxes, list your total itemized deductions, including charitable contributions. Should that amount exceed the standard deduction amount for your filing status, you should then itemize. Otherwise, take the standard deduction.

IRS requirements for charitable donations

Unfortunately, the IRS won’t allow you to just deduct any expense; they have some rules about what serves as a tax-deductible donation and where the donation goes. Here is an abbreviated list of what is not deductible as a charitable donation per IRS guidelines:

• Money paid for a raffle, bingo, or lottery ticket
• Amounts paid for tuition
• The value of blood donated to blood banks
• Amounts paid to labor unions, social and sports clubs, civic leagues, and chambers of commerce
• Donations made to most foreign organizations
• Amounts paid in homeowner’s association dues
• Donations made to individuals
• Donations made personal profit groups
• Donations made to lobby groups for law changes
• Donations for political groups or candidates running for public office

Types of qualified charitable organizations

Additionally, the IRS will only let you deduct contributions made to qualified organizations. Your donations have to go to a charitable organization that matches this criteria:

• Churches, temples, and other religious organizations
• Qualified charity groups
• 501(c)(3) non-profit organizations
• Nonprofit schools
• Nonprofit hospitals
• Volunteer responder departments (i.e. fire departments)
• Veterans groups and certain cultural groups
• Public parks, national parks and recreation facilities

Special Requirements for Non-Cash Donations (Donations Over $500 and $5,000)

Which records you need to maintain depends on the value of the donation. In other words, the amount and detail of documentation required by the IRS increases with the donation amount. As it relates to the Estate Pros, we will focus on non-cash donations over $500 as that’s what we specialize in:

Non-cash donations more than $500 but less than $5,000 – You must have a written acknowledgment and record (receipt), which should include the following:

• Organization’s name and address
• Date and location of donation
• Reasonably detailed description of the property donated

Non-cash donations of $5,000 or more – You can take the charity donation tax deduction for your non-cash single charitable donation for one item or a group of similar items that is more than $5,000 if the organization you donated to gives written acknowledgement and show certain records including a receipt that provides:

• Organization’s name and address
• Date and location of donation
• Reasonably detailed description of the property donated

You may also need a qualified appraisal. Qualified appraisals are necessary for:

• A single donated item or a group of items that is more than $5,000.
• Clothing or household items valued at more than $500 that aren’t in good condition (vintage clothing, for example).

Be aware, you will owe a tax penalty if the donated property’s value is significantly overstated. Additionally, the cost of the required appraisal can’t be used as a part of your charitable donation.

Do you need to fill out and file an IRS Form 8283 for your noncash charitable contributions?

If you donated a total (aggregate) amount of $500 or more in noncash donated property to charitable organizations or claim a deduction for donated property, use Form 8283 to report information about tax-deductible donations. As you complete the form, provide information about the donated property, including its description, cost or adjusted basis, when and how you acquired it, and who you gave it to. Additionally, the charitable organization receiving the donation must provide acknowledgment of the donation on Part IV of the form.

Maximizing Your Deductions

The timing of your charitable donations plays a strategic role in maximizing your tax benefit. Choosing the year in which time your donation is important in reducing your taxable income.

For instance, if you think you’re going to have higher income than usual you may want to plan to donate more and take your deductions to fall during that year. Conversely, you may want to defer donating to a different year if you anticipate lower income taxes during a given year.

It’s important to note that charitable donations are only deductible in the tax year in which they are made, meaning donations made after December 31st of a given year won’t be deductible until the following tax year.

Another strategy is bundling multiple years of charitable giving into one year. This may provide larger gains in your tax benefit by itemizing deductions in a single tax year, versus what you might receive from spreading the donations out over a few years.

Understanding the fair market value (“FMV”) of your items may also be helpful in maximizing your tax benefit. FMV is defined as the estimated price an asset would sell for in the current market under normal conditions, assuming a willing buyer and a willing seller, both acting independently and with reasonable knowledge of the asset’s value.

If the fair market of value of your donation items is fairly high you may want to consider having them professionally appraised. A qualified appraiser can provide you with all of the documentation necessary to ensure you get the largest tax deduction possible for your charitable items.

Donating to charity for tax purposes can be confusing. Avoiding these pitfalls when deducting charitable donations from your taxes is critical to your success:

• Not documenting your donations: A donation receipt is required for any contribution of $250 or more, or of any non-cash item.
• Overestimating the value of what you donated: Generally, you can estimate the value of your donation at what a thrift store would sell it for.
• Not using a qualified charity: A charity typically must be a 501c-3 for your tax donation to be deductible.

Step-by-Step Process

When considering donating furniture and other household goods to charity for a tax deduction you may want to consider taking the following steps to prepare:

Sort your items into different categories – donation items, items you may want to sell, items that need to be either recycled or designated for trash
Research the charity organizations you’d like to donate to – make sure they are a 501(c)(3) qualified non-profit organization, identify what type of items they will accept, do they pick up or will you have to drop off, etc
Make sure to get proper documentation – you will need to get a receipt from the charity documenting what you’ve donated, if you have high priced items you may want to have them professionally appraised, IRS Form 8283 may also be necessary depending on the total value of your donation
Keep a record of what you’ve donated – photograph and make note of all the items you’ve donated so you have a personal record, you may also need this when filing taxes, etc

Special Situations

Some donation situations require specialized procedures and documentation. These scenarios may involve extra steps or specific considerations.

Donating after an estate sale – the decedent may have designated charities they’d like to contribute to with special requests, etc. Also, make sure you know what donor name and address should be used for all of the documentation (name of trust, names of beneficiaries, etc)
Properties & Real Estate – these donations have to be made to a qualified organization and not for use by a specific individual. If you give property to a qualified organization, you can generally deduct the fair market value (FMV) of the property at the time of the donation.
Business inventory – these contributions must also be made to a 501(c)(3) and will have other requirements such as during a tax year your total charitable contribution deduction cannot exceed 10% of the corporate taxable income or 15% if food inventory, etc

Working with Professional Services

The donation process can sometimes feel overwhelming, especially if you’re dealing with a large amount of items or when handling a loved one’s estate. Employing professional service providers such as estate sale companies, professional organizers, tax professionals, appraisers, and charitable organizations may assist in making the process a little less stressful.

A professional estate sale company can help you organize, advertise and execute the liquidation of your items along with assisting the donation and junk removal of any leftovers.

Professional organizers can assist in sorting and organizing your items so you’ll know what you are moving, selling, donating and throwing out.

Choosing the right charity ensures your donation items go to the cause of your choice, helping those in need. Make sure the charity you work with is registered as a 501(c)(3) non-profit organization for tax considerations.

A qualified appraiser and a tax professional will help you navigate the donation process determining what has real value and what to expect as far as a tax deduction.

Digital Tools and Resources

There are a number of great resources worth investigating when donating to charity for tax deduction including donation tracking apps, valuation guides for assessing the value of your donated goods, accounting & receipt organizing systems such as Quickbooks, and tax preparation software like TurboTax. All of these tools will help you stay organized and ensure that you get the most out of your donation.

Common Mistakes

Moving and emptying out a home is a very involved and layered process, here’s some common mistakes you should try to avoid in order make it as seamless as possible:

Missing documentation – make sure to keep all of your donation receipts, tax documents, etc in order and in a safe place as you may need to refer to them at multiple points during the process
Overvaluing items – over appraising the value of your donated goods may raise flags with the IRS and could put in you in a position where you may be subject to an audit
Donating to non-qualified organizations – your charity of choice must be recognized as a 501(c)(3) organization in order for your contributions to be considered for your taxes
Missing deadlines – tax day is April 15 so make sure you have everything submitted in time to qualify for your deduction, otherwise, you can file for an extension if you can’t meet the deadline
Incomplete records – make sure you keep a record of all your donations either via spreadsheet, pictures, or both