One bonus of cleaning out your closet is the chance to take a tax deduction for your unwanted items, but many people don’t take full advantage of this benefit – they usually drop their stuff at Goodwill then write, “3 bags of clothing, household goods, etc.” on their receipt. When it comes time to say how much to deduct, they usually ballpark a number that is probably lower than what they actually gave. That’s leaving money on the table, people.
With a touch of extra organization you can turn your unwanted stuff into a much better tax deduction. The key to maximizing your deduction is proper documentation. The guidelines for what’s required by the IRS vary by the value of your donation.
For items totaling less than $250 given to one organization, all that’s required is a receipt with the name of the organization, date and location, and a reasonably detailed description. A letter works, or if you’re dropping off at one of those un-staffed boxes in a parking lot, simply put a note with the above details in your tax files.
To deduct items valued at least $250 but less than $500, you must have the above PLUS:
• A written description of the items (an Excel spreadsheet works)
• Written acknowledgement from the charity that you did not receive goods or services in return for the donation (this is usually on the receipt)
• Description and good faith estimate of the value of any services you DID receive (for example, if you donate an item to a silent auction and receive a ticket to the event in return – the value of the ticket lowers your total donation value)
If your donations to one organization total at least $500 but less than $5,000, you must state all of the above PLUS:
• How you acquired the goods (usually via purchase or gift)
• The approximate date you acquired the property
• What you paid for the property
And if you’re giving something valued at more than $5,000? You’ll also need a qualified written appraisal to attach to your tax return justifying the high amount.
In addition to an Excel spreadsheet, I also take a digital photo of all my items to demonstrate that they are still in good, reusable condition. I keep a photo album for these files, separated by year, then I burn them all onto a CD at the end of the year to keep with my tax files.
Finally, the ultimate question: how does one determine the actual value of each item? There is a rule of thumb that 25% of the amount you originally paid is a safe estimate. Or you can reference Goodwill’s valuation guide at http://www.goodwill.org/wp-content/uploads/2010/12/Donation_Valuation_Guide.pdf, which gives you a range of values for commonly donated items.
This Blog Post was written by Kelley C. Long, CPA/CFP(r). She is the Director of Communications &; Marketing for Shepard Schwartz &; Harris LLP and a national spokesperson for financial literacy through Feed the Pig and 360 Degrees of Financial Literacy. She cares passionately about teaching Americans about money so that they can free themselves from financial worry.”