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How To Deduct Donations From Your Taxes?
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How To Deduct Donations From Your Taxes?
If you're running a business as a sole proprietor, self-employed individual, freelancer or 1099 employee, you have to be your own hero, serving your clients and doing every single thing required to keep your business running on your own. Maybe you also find time to go the extra mile for society and make goodwill charitable contributions to various worthy causes in the community.
If this sounds like you, you'll be happy to know that the Internal Revenue Service (IRS) rewards you for those donations. You can deduct every goodwill charitable contribution you make from your taxable income. While this deduction doesn't affect self-employment taxes, it does help when paying income taxes.
Before you claim each goodwill donation tax deduction, there are a few things you'll want to keep in mind.
Key highlights:
- Find out what qualifies an organization to receive tax-deductible donations
- Learn what types of contributions qualify as tax-deductible
- Understand the process for claiming charitable contributions as tax deductions
Table of contents
What is a goodwill tax deduction?
A goodwill donation tax deduction is a tax write-off you can receive for making a charitable contribution to an organization with 501(c)(3) status. A 501(c)(3) organization can be a trust, an unincorporated association or any other organization that is exempt from federal income tax. If you want to deduct your donation to an organization, make sure the organization has 501(c)(3) status.
For tax purposes, a charitable contribution is similar to an itemized deduction. In the same way that you can deduct your itemized work-related expenses, you can also deduct charitable contributions from your taxable income.
But if you choose the standard deduction method for the 2023 tax year, you won't be able to deduct charitable donations from your taxable income. So if you've made significant donations to qualifying organizations, it might make more sense to itemize your deductions. If you're self-employed making estimated tax payments, a lower taxable income is good news.
What are the organizations qualified for goodwill tax deduction in 2023?
Want to donate to a worthy cause but not sure which organizations qualify? The IRS has a list of tax exempt charitable organizations that you can donate to and receive a tax deduction. Here are a few:
- Animal welfare organizations like the American Humane Association.
- Religious organizations like churches, synagogues, temples and mosques.
- Trusts to support American war veterans.
- Non-profit organizations (NPOs) that work for community welfare.
- NPOs that work to prevent cruelty against children, like the American Professional Society on the Abuse of Children.
- Volunteer fire services.
- Voluntary civil defense organizations.
- Non-profit cemetery organizations, as long as the charitable donations are exclusively being used for the upkeep of an entire cemetery facility.
How can I deduct clothing donations and other kinds of cash donations?
It’s easier when deducting cash donations like payments through check, cash, debit or credit cards, Electronic Funds Transfer (EFT) or gift cards. When you make a cash donation, you have to keep the receipt to show to the IRS when the time comes. These receipts have a cash amount value that you can enter on Schedule A of Form 1040.
It takes more homework to know the value of other goodwill donations, such as clothes, food items, shoes, vehicles, jewelry, art, antiques, furniture or art. You can deduct these goods' fair market value, or the equivalent amount an item sells for in the open market.
For some goods, like recently purchased items, the fair market value is easy to find. An item's current selling price can be used to prove the value of the item you donated to the IRS. It's more difficult to find second-hand goods because you need to factor in several things that influence their fair price.
In addition to cash and clothing donations, you can contribute to a charity with volunteer work and receive tax deductions that are associated with that work, but you can't deduct the fair market value of the hours you work.
What you can deduct is the cost of traveling to and from the site where you did the volunteer work. You can also deduct the cost of uniforms, essential supplies and meals if you're traveling overnight.
To claim a goodwill tax deduction, the IRS requires you to submit records, such as bank statements, credit card statements or records of checks to charitable organizations.
How much of a donation is tax deductible?
If you make charitable donations before 2021, you could deduct their full amount up to 60% of your adjusted gross income. This limit was revised in 2021, and you can now deduct up to 100% of your adjusted gross income.
The rules for corporations making a goodwill tax deduction are slightly different. A company can deduct a maximum of 25% of its taxable income using qualified philanthropic contributions.
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