How To Claim A Goodwill Tax Deduction: A Guide For The Self-Employed

6

Min Read

Tom Smery

If you have donated money, clothing and household items, or any other goods to your local Goodwill stores or any other qualified organizations this year, then you may be entitled to a deduction on your taxes. According to the Federal Law, donations to goodwill can qualify as a self-employment (1099) tax deduction as long as you choose the right deduction method.

So, how can you claim a Goodwill tax deduction? In this article, we will explain the types of contributions you can deduct and what organizations you can make deductible charitable contributions to. 

We will also go over the IRS requirements to help you get everything ready for your next tax filing. 

If you need help estimating your taxes, check out Bonsai’s free self employment tax calculator. We will make this process easier and faster for you.

Let’s begin with the types of organizations that are qualified for tax-deductible contributions:

What Are Qualified Charitable Organizations

A qualified charitable organization is defined as a non-profit organization that according to the U.S Treasury, qualifies for tax-exempt status. Organizations must operate exclusively for the established exempt purposes by the IRS (Internal Revenue Service). Some examples are: 

  • Advancement of education and science
  • Religious organizations like churches, temples, or synagogues
  • Relief of the poor (Charity)
  • Non-profit hospitals and volunteer fire departments
  • Prevention of cruelty to animals or children
  • Development of amateur sports

Only donations made to qualified charitable organizations are tax-deductible. Monetary support to political parties, campaigns, and action committees will not translate into a charitable donation. These are some other examples of donations that would not qualify for a charitable contribution deduction:

  • Fundraising tickets
  • Person to person (Donations to help individual causes must be made through a qualified organization in order to be tax-deductible)
  • College tuition
  • Any other donations for which a receipt was not obtained

Qualified organizations can receive both cash and non-cash contributions. Let’s review the details of each type of contribution for a better understanding.

Making Non-Cash Contributions

Non-cash contributions can be deducted by keeping the records of the property donated to any qualified charitable organization throughout the year. You are able to deduct the fair market value of any household goods, furniture, clothing, shoes, books, etc. 

What is the Fair Market Value (FMV)?

The fair market value is the price a property, business, or other assets would sell for in an open market. Considering both buyer and seller have reasonable knowledge of the asset and are under no pressure of selling or buying. In other words, it is the value of donated items.

There are four factors that can help to determine the fair market value of your donation:

  • Cost or selling price
  • Replacement cost
  • Sales of comparable products
  • The opinion of experts

Goodwill also provides a “Value Guide” offering average prices for items in good condition.

What are the requirements?

For amounts of a minimum of $250 and up to $500, you need a written acknowledgment like a receipt for taxes, donation statement, or letter from the charity. 

It must include the name and address of the organization, a description of the property donated, the original cost, and the fair market value of the property at the time of the donation.

To claim a deduction for a non-cash contribution that goes from $500 up to $5,000 you must also complete the IRS Form 8283. This form requires additional information like the means of acquisition (gift, purchase, inheritance, etc.) 

In addition to all of the above, non-cash contributions that go over $5,000 you must present a qualified appraisal (monetary value assessment) of the property donated, issued by a qualified appraiser.

Making Cash Contributions

Cash contributions include any payment made by check, cash, online payment service, debit or credit card, and electronic funds transfer. Corporations can deduct up to 25% of their taxable income, while individuals can deduct up to 100% of their AGI (Adjusted gross income).

What Are The Requirements?

A charitable tax deduction for a cash contribution of $250 or more must be proven by written evidence that includes the name of the organization you made the donation, the date and amount of the contribution. 

These are some examples of written evidence acceptable to the Internal Revenue Service (IRS):

  • Pledge cards
  • Cleared checks
  • Donation receipts
  • Bank statements

Contributions are not subject to an amount limitation, but if you made more than one donation of $250 or more, you should have written evidence of each of them provided by the organization. It can be either a separate acknowledgment for each one or one document that shows the total donation including the dates and amount of each.

Standard Vs Itemized Deduction

At the time of filing your independent contractor taxes, you have two options: Standard or itemized deduction. Usually, taxpayers calculate their tax deduction with both options and choose whichever comes up as the highest. 

Keep in mind, you can only claim a deduction for charitable contributions if you choose the itemized option. Let’s go over both options for a better understanding:

Standard option:

The standard deduction reduces a fixed dollar amount from the income you are taxed on. It can be different depending on your filing status. The standard deduction amounts in 2021 are:

  • $ 12,550 - Single or married person filing separately
  • $ 25,100 - Married filing jointly
  • $ 18,800 - Head of household

Itemized option:

The itemized deduction also reduces your AGI (adjusted gross income) but it is not based on a set dollar amount. Itemized deductions are calculated by adding up all of the applicable deductions and subtracting that number from your total taxable income. 

Applicable deductions include mortgage interest, medical expenses, and of course goodwill donations. Itemized deductions are filed under Form 1040 (Schedule A attachment). 

Keep in mind you must have all your tax receipts, including the ones from qualified charitable organizations so you can show them in case of an audit by the IRS. Use Bonsai’s digital tax receipt organizer to help you out.

Takeaways

These are the main points to keep in mind when claiming goodwill tax deductions:

  • Your donation must be given to qualified non-profit organizations in order to be a legitimate tax deduction.
  • Keep all of your charitable contributions tax receipts to show in case of an audit by the IRS.
  • You cannot deduct contributions made to specific individuals, candidates, or political organizations.
  • For non-cash contributions, the fair market value of your donation is the price agreed on between a willing buyer and seller with reasonable knowledge of the asset.
  • To claim a deduction for contributions equaling $250 or more (cash or property) you must be able to prove it with a bank record or any written acknowledgment given by the qualified organization. 
  • You can only claim tax deductions for goodwill donations if you choose the itemized deduction option for that taxable year.

Check out this overview of Bonsai’s Freelance Tax Resources if you need more help managing your self-employment taxes.

Tom Smery
Tom Smery is a certified CPA for over a decade. In his free time, he writes articles to pass on his expert knowledge on taxes and accounting. Thomas has a wide range of deep knowledge on 1099 taxes, and finance topics. You can find him fishing when he is not preparing taxes for his clients or writing about accounting.

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