With less than one week until Christmas, it’s go time! That time of year when people run around like crazy trying to attend to their last minute errands before year end.
Are they Christmas shopping? Yes.
Are they fixing up their homes in preparation for visiting relatives? Yes.
Are they dropping off non-cash charitable donations at their local 501(c) registered non-profit organizations? If they are net worthy, then that’s a big fat yes!! And why are they doing it now? Because if they don’t get it done by December 31st, then they have to wait another year to get the tax benefit!
Read on to learn more.
If you are not familiar with the U.S. tax system, then you may not be aware that the government provides a powerful incentive to encourage people to donate cash, goods, and services to official 501(c) registered non-profit organizations.
A 501(c) designation just means that the organization has met all of the necessary criteria and has registered with the U.S. government as an official tax-exempt non-profit organization in the United States. Only donations to these officially registered organizations count for the incentive.
What’s the incentive you ask? Well, if you “itemize your taxes”, then you can take the value of any charitable donations and deduct them from your taxable income. I’ll explain “itemizing” further below, but what’s important to know now, is that itemizing could end up saving you big money on your annual federal tax bill. The savings will be dependent on your marginal tax rate.
Here’s how it works:
- Your marginal tax rate will vary depending on your income and filing status, but for 2016, it’s likely that it will be either 25%, 28% or 33%. For additional details on 2016 marginal tax rates see 2016 tax brackets.
- So, if you donate $1,000 to a 501(c) organization, then you would be able to deduct $1,000 from your taxable income. If you are in the 33% tax bracket, then you would pay $333 less in income taxes.
- The bottom line is that your $1,000 tax-deductible donation will only cost you $667 because you received a $333 tax benefit. Cool, right?
In order to take advantage of this incentive, you need to itemize your deductions.
Who Should Itemize Their Tax Deductions
If you haven’t itemized your tax deductions or taken the charitable contribution deduction before, you may be wondering who should be taking this deduction or if you are even eligible. This is pretty simple to figure out.
In 2016, everyone who files their taxes will receive the minimum standard tax deduction. It is $6,300 if you are single or $12,600 if you are married and filing jointly. This deduction reduces your taxable income and you get it automatically. It is your worst case scenario. Can you do better? Yes.
If you have qualified tax-deductible expenses that exceed the standard deduction above, then you can deduct those expenses from your taxable income. This is called “itemizing your deductions” or “itemizing” for short.
What You Can Itemize
For most people, the two items that push them up and over the standard deduction limit and into the zone where they should itemize are the interest paid on their mortgage (or HELOC, see Why HELOCs are Awesome) and the property taxes on their primary residence.
Both of these items are tax deductible if you itemize. This is the reason that most homeowners itemize their taxes, at least until their mortgage is paid off. Once the mortgage is paid off, you may not be itemizing if you do not live in a high property tax area.
Other items that are deductible if you itemize your taxes in addition to your mortgage and HELOC interest and property taxes:
- State and local income taxes
- Sales taxes
- Qualified medical expenses
- Only to the extent that unreimbursed medical expenses exceed 10% of your Adjusted Gross Income. That’s a lot of money, so most people don’t qualify.
- Charitable contributions
If you are itemizing your deductions, then you should keep track of all of your charitable contributions throughout the year and deduct them from your taxable income. Even $10 is worth it because every dollar counts to reduce how much tax you will owe.
Making Non-Cash Charitable Donations
So, now that you know how to figure out if you should be itemizing, here’s one of the most underutilized tax tips around. While donating cash to quality 501(c) organizations is good, donating non-cash items is even better. Here’s why.
If you give a charity $1,000 of cash, you may save $333 on your taxes, but you’re still out $667. That’s fine if you were going to donate the $1,000 anyway, but what if you’d rather put that cash towards your long-term savings goals? Then donate stuff instead of cash.
Simply contact a local non-profit that accepts merchandise. Common national charities that will accept items for donation are Goodwill Industries International, The Salvation Army, or PurpleHeart. Many groups will even come out to your house to pick up your stuff. Over the years, we have donated thousands of dollars’ worth of stuff to all three in our area.
Why are non-cash donations so great? Because you can get rid of stuff that is cluttering up your house anyway, donate it to a worthy cause to help the less fortunate, and you get to deduct it from your taxes as well. So, in this case, you could donate $1,000 worth of stuff that you weren’t using anyway, and if you were in the 33% tax bracket, then you would save $333 on your taxes. What could be better?
In our experience, once you have kids in the house, donation possibilities go through the roof! Just the clothes alone make up bags and bags of our donations every year. In addition to clothes, we’ve donated toys, books, games, DVDs, CDs, furniture, the list goes on and on.
Looking back at my tax records for the past few years, we’ve donated between $2,000 and $3,000 every year for the past several years. That has saved us thousands of dollars on our taxes. How did we determine the value?
Determining the Value of Your Non-Cash Charitable Donation
When you make non-cash donations, you need to do two things. First, you need to determine the value of your donation and then you need to make sure you have sufficient documentation. Let’s talk about determining value.
When you donate things like clothing, furniture or other household items, you need to determine their value. One way to do this is to find out what your local thrift shop is charging for similar items, checking prices on ebay or Craigslist, or you could use a software program like ItsDeductible.
From personal experience, I can tell you that I’ve been using ItsDeductible for years and it works great. Plus, if I’m ever audited, I can point to the source where I got my information from. It’s owned by TurboTax and is free to use.
If you are audited, the IRS will want to see proof of your donation. For donations under $250, the substantiation is relatively straightforward. Per the IRS guidelines:
“Taxpayers must receive and keep a receipt from the charitable organization showing the name of the organization, date and location of the contribution, and a reasonably-detailed description of the property. A letter or other written communication from the organization acknowledging receipt and containing the information previously mentioned will satisfy as a receipt.”
This is easy enough to obtain and all legitimate 501(c) organizations are familiar with the IRS regulations and will provide you with the appropriate documentation.
If you will be donating items that are worth more than $250, I would check the IRS guidelines or work with a tax professional to make sure you have all of your ducks in a row. You need more documentation for the higher value donations.
Don’t Give the Government Any More Than They Are Due
Over the years, I’ve been surprised by the number of people I know personally that drop-off bags of clothes or other items at non-profits and don’t even ask for a receipt. “Don’t you need a receipt for your taxes?” I’ve asked. “Too much trouble,” or “I don’t bother,” is the response I always get.
For some reason, people feel like it’s too much of a bother to save hundreds on their taxes. I don’t. In fact, I just went to the Salvation Army yesterday for our final drop-off of the year. Why wouldn’t you take advantage of your legal right to reduce your tax bill?
We’ve made it a habit in our household to make a quarterly donation. It times well with the change of seasons, so we can go through our closets, garage, and basement and clean out all of the accumulated clothes and other stuff that we know we won’t be using again. We don’t always hit the quarterly mark, but by shooting for quarterly we actually end up taking care of it two or three times a year.
So, if you are itemizing your taxes this year, don’t forget to get out there and make a final non-cash charitable donation before time runs out. Your net worth will thank you!
Have you been itemizing your tax deductions? Have you been taking advantage of non-cash charitable donations to lower your tax liability? What other tips do you have to make the non-cash donation process easier?