by Stephanie Berenbaum – June 3, 2010
With A Trip To Goodwill!
Don’t really understand how a trip to Goodwill can reduce your tax bill? Are you someone who never bothers to get a donation receipt when you donate bags of clothes to the Salvation Army? Think that only the rich can see tax benefits from charitable donations? Not true! Even small charitable donations can help you save money…by reducing your taxes!
In speaking with our friends about giving to charity, there seemed to be some misconceptions. Of course when you donate you are helping the needy, but the benefit to you (besides the obvious joy of helping others) is that you can reduce your taxes. But many people don’t understand how this works, what it means, or why they should bother if they are not donating thousands of dollars a year.
Understanding the Savings
Some people we spoke with were under the mistaken impression that you get to deduct the actual contribution amount from the amount that you owe the government. That is incorrect, though wouldn’t it be great if it were that simple? Figuring out the tax benefits of your donation is a little more complicated (but, don’t worry – not much!).
Charitable donations reduce your taxable INCOME (gross income before deduction) by the amount of your contribution. Since different incomes are taxed at different rates, you need to look at which tax bracket you are in to see what the actual savings will be. For example, if you are in the 25% tax bracket and your tax-deductible contributions for the year are $500, your taxable income is reduced by 25 percent times 500, which is $125. Once you get the hang of the formula it is pretty easy to understand.
Not every non-profit qualifies as a tax deductible organization. Be sure to check with the organization first to determine their IRS status. For example, many people wonder if donations to political parties and/or organizations are tax deductible – they are not!
Fair Market Value
Ok, so let’s say you are donating a bag of clothes. How are you supposed to value them? Goodwill actually has a suggested valuation sheet, but most organizations do not. The IRS standard is ‘Fair Market Value’ – meaning what you could get if you sold your used sweater TODAY – not what you originally paid for it. Some people use formulas of 20 or 25 percent of the actual purchase price, of course depending on the condition of the item.
Of course, the more documentation you have (original receipts from items you are donating) the better off you will be – and the less worry you’ll have about a potential audit. Yet another good reason to be organized about receipt keeping — besides helping you keep track of what you spend, they will come in handy at tax time!| Print
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