January often means two things for most people: The sudden, burning desire to declutter, and the beginning of tax season. Neither are usually all that much fun, but they are related. By getting rid of some of your unwanted stuff, you can score a decent deduction on your tax bill – but only if you follow the rules, and only if you plan your donations accordingly.
Before you pack up your old clothing to drop off at Goodwill, or give your old car away to your church, do a little homework to learn how you can get the most benefit from your donations. There’s a good chance that you could pay the IRS more than you need to if you don’t.
First Things First: Taking Tax Deductions
One of the tricky parts about getting a tax deduction for charitable giving is that to get tax credits for your generosity, you have to itemize your deductions on your taxes. The IRS notes that about 80 percent of taxpayers just take the standard deduction when they file, meaning that there are a whole lot of donations that go uncredited. Whether or not itemizing deductions is right for you depends on several factors, so it’s best to consult with a tax professional to determine your best course of action.
It’s also important to note that while fewer than 1 percent of taxpayers are ever selected for an audit, a significant deduction for charitable giving can raise red flags. The IRS assumes certain levels of giving based on Adjusted Gross Income. Donating more than what is considered reasonable for your income (for example, your AGI is about $75,000, the IRS considers about $3,500 in charitable giving reasonable) might capture the agency’s attention. If you have legitimately donated a higher amount – say, you donated your old boat or vehicle to an organization like Boat Angel and it has a value of $8,000 – then you are entitled to the deduction, and providing proof of your giving to the IRS will satisfy them. However, you can’t clean out your basement, drop everything off to a charity resale shop, and expect to claim $5,000 for your collection of old T-shirts.
That raises the question of what type of donations – and how much – you can deduct.
Making Donations: What Counts?
When discussing what you can donate for a tax deduction, it’s easier to say what you can’t deduct. And the biggest thing? Your time. Even if you spend hundreds of hours volunteering, you cannot get a tax deduction for it. However, you can deduct expenses associated with your volunteer work, including tolls, parking, clothing, and supplies. Mileage can only be deducted at 14 cents per mile (and that covers your gas, etc.). Everything else, though? Pretty much fair game. So, whether you have a stack of ugly sweaters or a sofa that’s seen better days, if you can find a charitable organization to take it, you can claim it as a charitable deduction.
But … there are some caveats.
- You must donate to a qualified charitable organization. You can find a list of these organizations on the IRS website; the list does not include churches, synagogues, and mosques, but those also qualify. Donations you make to individuals don’t count – no matter how deserving.
- You must get a receipt for your donation. The charitable organization will happily give you a receipt acknowledging your donation; it needs to include the name of the organization, the date, and the nature and value of the donation. You don’t have to submit receipts with your tax return, but if you get audited, you’ll need them as proof.
- You need to claim a reasonable value for your donation. Unless an item is brand new, unused, and high value, you cannot claim what you paid on your taxes. Use a valuation chart (available from the Salvation Army and other organizations) to calculate the value of your donation. A high-end men’s jacket in good condition, for example, is typically only worth about $12 to $15. Remember, claiming too much is a red flag. For more valuable donations, such as a vehicle or boat, if it is worth more than $5,000 you need to get an appraisal.
- Deduct the value of gifts from your donation. Did you get a T-shirt or tote bag when you donated to an organization? You have to deduct the amount of that gift from your donation amount. The charitable organization will tell you the value of the gift. Remember, you can always refuse these gifts, too.
Decluttering the house has many benefits, not the least of which is helping you help others. If you are going to take a deduction for your generosity on next year’s taxes, though, keep these rules in mind.