How To Use The Goodwill Donations Tax Deduction
Have you donated money or goods to your local Goodwill stores or other qualified non-profit organization this year? If so, your donations may qualify as a self-employed tax deduction if you itemize deductions on Schedule A on Form 1040. To be deductible, you must make contributions to qualified organizations. Contributions to individuals are never deductible. This article explains how you can determine the value of donated property given to qualified organizations, the types of organizations to which you can make deductible charitable contributions, and the types of contributions you can deduct. It also discusses any limit for contributions that can be deducted on a tax return, what records you must keep, and how to report charitable contributions.
Qualified Charitable Organizations
A qualified charitable organization is a nonprofit organization that qualifies for tax-exempt status according to the U.S. Treasury. Qualified charitable organizations include groups operated exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to animals or children, or the development of amateur sports. As mentioned above, only donations that are made to a qualified charitable organization are tax-deductible. For example, let’s say, you donated $10,000 to political parties. Although this is a great way to get involved in politics and your community, donations to political organizations or candidates are not tax-deductible.
Cash contributions include payments made by cash, check, electronic funds transfer, online payment service, debit card, credit card, payroll deduction, or a transfer of a gift card redeemable for cash.
The Charitable cash tax deduction must be proven by written evidence showing the name of the charitable organizations, the date of the contributions, and the amount when it comes to an IRS audit. Written evidence for taxes acceptable to the Internal Revenue Service includes the following:
- Donation receipts from the charitable organizations
- Cleared checks
- Bank or credit card statements
- Pledge cards
Each of these documents must include the name of the organizations, the dates, and the amounts of the donation.
In most cases, the amount of charitable cash contributions is limited to a percentage (usually 60%) of the taxpayer's AGI. Qualified contributions are not subject to this limitation. Individuals may deduct qualified contributions of up to 100% of their adjusted gross income. A corporation may deduct qualified contributions of up to 25% of its taxable income. Contributions that exceed that amount can carry over to the next tax year. To qualify, the contribution must be:
- a cash contribution;
- made to a qualifying organization;
- made during the calendar year 2020
Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.
If you made more than on contribution of $250 or more, you must obtain and keep in your records a contemporaneous written acknowledgement from the qualified organization indicating the amount of the cash. It could be either a separate acknowledgement for each or one acknowledgement that lists each contribution and the date of each contribution and shows your total contributions.
You can deduct the fair market value of household goods, shoes, books, furniture, clothing, and so forth. What is the fair market value then? Fair market value (FMV) is that property would sell for on the open market. In other words, it is the value of your donation. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and not having reasonable knowledge of the relevant facts. In making and supporting the valuation of property, all factors affecting value are relevant and must be considered. These includes:
- The cost or selling price of the item,
- Sales of comparable properties,
- Replacement cost, and
- Opinions of experts.
Goodwill is happy to provide a “Value Guide” that offers average prices in our stores for items in good condition
For a non-cash contribution, the records you must keep depend on the fair market value of property donated to any charitable organization during the year. For amounts of at least $250 but not more than $500, a written acknowledgement such as a receipt, letter, and donation statement from the charity must be obtained including:
- the name of the organization (or donation center)
- the address of the organization or Goodwill location
- a description of the property donated
- the original cost or basis of the property
- the fair market value of the property at the time of donation
The IRS Publication 561 states: The condition of the item or household good that is not in a good used condition or better for which you take a write-off of more than $500 requires a qualified appraisal.
If you claim a deduction over $500 but not over $5,000 for a non-cash charitable contribution, you must complete IRS Form 8283 and have the contemporaneous written acknowledgment. On the Form 8283, additional information needs to be added such as the means of acquisition (e.g. purchase, gift, inheritance, exchange, etc.), and any adjustments to basis must also be provided by a taxpayer.
For household items or non-cash contributions over $5,000, in addition to all of the above, a qualified written appraisal of the contributed property must be obtained from a qualified appraiser. According to IRS guidelines, you are allowed to write-off the fair market value for gently-used items.
Standard Deduction vs Itemized Deduction
Charitable contributions can only be claimed as a tax deduction if you choose to itemize your taxes. What other option do you have other than itemizing then? – Standard deduction. Generally, taxpayers choose the larger deduction, standard or itemized, when it’s time to file your independent contractor taxes. You’d itemize when the combined total of your expected deductions – including charitable donations – add up to more than the standard deduction.
2020 Standard Deductions
Married Filing Jointly
Head of Household
Can I claim a deduction for food?
Yes, you can claim the cost when you donate groceries to a qualified charity. Just be sure to get an acknowledgment of your donation such as “seven spams and a dozen of Dunkin’ donuts”. Make sure you keep your grocery store receipt to prove the prices of the donated items.
To sum up, you always have to provide proof of the donation to claim a deduction for charitable contributions except for donations of $250 or less where it is impractical to obtain a receipt. Also, you must itemize deductions on a Schedule A on Form 1040 and your donations should be to a qualified nonprofit organization. If you have any questions about the charitable contribution deduction or Goodwill donations for your income tax, contact a tax professional.