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The Season for Giving and Last-Minute Tax Deductions

by
Bret Willoughby
on
11/20/2017
The Season for Giving and Last-Minute Tax Deductions

As 2017 draws to a close, it's definitely the time of year to think about last-minute tax deductions that you can take. It's also a good time to make that appointment with your accountant if you haven't done so already, so you can have an idea of what your tax situation is going to look like come 2018. And if you're trying to come up with ways to save on taxes at the last minute, giving to charity is one of the first things that you might think of. After all, the holiday season is a time for giving back to your community and supporting causes that you care about. It's not called the season for giving for nothing: The Center on Philanthropy at Indiana University estimates that 24 percent of people's total annual giving is done between Thanksgiving and New Year's Day, with 42.7 percent of households earning $200,000 or more giving more during this time frame as well.

However, while giving out of the kindness of your heart is definitely a wonderful thing you should do as a person -- there are things you should be aware of when it comes to how your giving activities will affect your taxes.

You Need to Itemize on Your Tax Return to See Any Benefit

The IRS estimates that two out of three taxpayers take the standard deduction instead of the itemized deduction on their federal tax return. Many states also employ a matching principle, meaning that you need to itemize on your federal return to itemize on the state return (and in some cases, it's worth it to take a smaller federal itemized deduction if your state one will be substantial). On your federal return, you must file Schedule A and take the itemized deduction in order to see any benefit from your charitable giving.

Give because it makes you believe in the mission of the organization, but you won't get a write-off unless you itemize.

Donations Need to Be Made to an Eligible Organization

Generally, if you see 501(c)(3) in the organization's website's footer, then your donation is tax-deductible. If the organization is a house of worship, fraternal lodge, school, or nonprofit for education, community service, the arts, sciences or other public purpose, and you aren't sure if it has a 501(c)(3) designation, you should consult the IRS Select Check database.

There are many types of nonprofits and operations that rely on donations, which makes this even more confusing, so the IRS Select Check is helpful. You can't deduct contributions to social clubs, political organizations or candidates, or community fundraisers that don't have a nonprofit charter. This also includes gifts to individuals such as donating to crowdfunding campaigns, giving money and goods to homeless individuals, or drives where the beneficiary isn't an eligible organization. While very generous, there's no tax deduction.  Foreign or International Charities only qualify for the deduction if they are "controlled" by a U.S. 501(c)3

Non-Cash Donations Are Subject to Additional Scrutiny

Non-cash donations are valued at their fair market value. So if you bought a new toy for a toy drive, the price you paid is deductible. When it comes to used goods, it's not as simple. Cleaning out your closet for coat drives or making room for all those new gifts often entails a trip to Goodwill or another thrift store to also get a last-minute tax deduction. Overvaluing these deductions is common because you're thinking about what you paid, not the market value of thrift store goods. Goodwill posted this useful valuation guide on their site, which can help you determine the value for your donations.

Food bank donations are treated similarly. Your food bank may provide a valuation guide, but it's typically the price you paid or something close to it. If you have a substantial donation, such as the infamous "Pudding Guy," you definitely want to have some kind of authoritative reference handy.

For more valuable collectibles, eBay and other auction sites are a good frame of reference. Authoritative guides like Kelley Blue Book for donating cars that still work are also helpful references. For very large donations, it's a good idea to get a professional appraisal. It is also required for any single donation worth $5,000 or more. Whether the appraisal is required or not, you can also take the appraisal fee as a miscellaneous deduction.

Financial assets can be donated as well, and your broker can arrange this easily. This is great if you have stock that increased in value and you don't want to get burned on capital gains tax, because you'll get a deduction at the fair market value and not the purchase price.

Regardless of where and what you donate, any non-cash donation valued at $250 or more needs to have written acknowledgement from the organization. So if you've got lots of bags and boxes for Goodwill, ask for a letter in addition to your donation receipt.

Personal Expenses for Volunteer Work

Volunteering for causes that you care about or making your community happier during the holidays are great ways to spend your free time. If you volunteer for an eligible organization, you can also deduct certain personal expenses. This doesn't include helping out your neighbors or strangers on your own. But if you're driving for Meals on Wheels or volunteering with your house of worship to give presents to needy families, then you may have some tax benefits you were unaware of.

You can't take a deduction for the actual value of your time or the services rendered, such as if you're a computer technician who charges $100/hour, and you set up the computers for a struggling nonprofit for free, or you're cashiering at a volunteer event, and this job pays $9/hour in your area. But the money you spend on travel, postage, supplies and uniforms, and other expenses related to your volunteer work is deductible. Travel includes airfare, public transit and taxis, and $0.14/mile for the 2017 tax year for miles driven.

Contributions of Unused Employee Time Off

If you are short on cash, you might inquire to see if your employer is participating in the IRS program allowing you to donate unused vacation, sick and personal time to hurricane Harvey, Irma and Maria relief and Northern California wildfire relief. If participating, your employer will convert the used time off into cash and contribute it to a qualified relief charity. You will not get a charity deduction, but better yet the time off is not included in your income for the year.  This program runs through 2018.

Everyday acts of compassion and kindness should be encouraged even if you don't get a tax benefit. But if you want a last-minute tax deduction, keep good records for any of the above activities.

Bret Willoughby writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Bret Willoughby

Bret Willoughby

Bret Willoughby is a practicing tax preparer for expats throughout the world. He created Providence Payroll to meet the needs of Churches, not-for-profit organizations and businesses with remote workers. His web-based payroll processing service benefits both employers and remote workers with an easy way to access payroll information. Clergy have unique payroll and tax-related issues, one that Providence Payroll is qualified to manage.

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