Obviously giving to charities provides a benefit in and of itself. However, charities usually incentivize donations by highlighting the fact that your donation is tax deductible. And while it’s true you can deduct for most charitable contributions, the tax deduction may not actually benefit you. In short, you may not contribute enough to actually reduce your taxes.
The following analysis will help you figure out whether your charitable donation will provide the tax benefit often implied.
Types of Charities
To begin with, you can only take the charitable contribution deduction for money given to charities deemed acceptable by the IRS. Most of these charities are designated 501©(3) organizations, named after the section of the Internal Revenue Code that gives non-profit status to certain charitable groups. However, some churches and other religious organizations don’t need to apply for that status and can still provide the deduction. Make sure to research whether your organization meets the criteria for a deductible contribution.
The Deduction
You take the charitable deduction itself as an itemized deduction on your schedule A. Don’t worry if those words don’t mean anything to you right now, they will by the end of this section.
As a brief overview, your tax return can be broken down into five major parts:
- Income: In this section, you total your income from all sources for the year. This figure is your gross income.
- Adjustments to income: Here, you subtract certain allowable deductions from your gross income to get a figure called your adjusted gross income (AGI).
- Taxes and Credits:Next you figure out the amount of your income that you pay taxes on (taxable income), the tax owed on that income, and take any allowable credits away from that tax.
- Other Taxes: In this section, you add in other taxes you may incur (e.g., self-employment tax, additional taxes on retirement plan withdraws, and/or household employment taxes).
- Payments: Lastly, you take into account money you have paid to the government during the year (e.g., withholding from your paycheck, estimated tax payments, or refunds applied forward from other years). If you have paid in more than you owe, you get a refund. If not, you need to pay more when filing your return.
The deduction for charitable contributions happens in the Taxes and Credits section. In figuring out your taxable income, you take your AGI from section 2 and subtract your personal exemptions (a deduction for each person in your household claimed on the return) and either your standard deduction (a preset amount based on your filing status) or itemized deduction (certain deductions given preference by the Internal Revenue Code).
When choosing between taking the standard deduction or itemized deductions, you choose whichever deduction allows you to subtract the most from your AGI.
For 2013, we get the following standard deductions:
- $6,100 for a single filer
- $12,200 for a Married Filing Jointly and Qualifying Widower
- $6,100 for Married Filing Separately
- $8,950 for Head of Household filing
Itemized deductions, as I said above, are special deductions allowed by the government for expenses like mortgage interest, real estate taxes, unreimbursed employee expenses, and yes, charitable contributions. You can get the full list of deductions on the Schedule A. Again, all of these deductions added together must exceed your standard deduction in order to benefit you.
Does this deduction benefit you?
The last thing to figure out is whether you will actually benefit from the deduction. You likely will if you own a house and deduct your real estate taxes and insurance. You may also itemize if you have a lot of medical expenses or unreimbursed employee expenses. These deductions in addition to your charitable contributions will likely exceed your standard deduction, and thus reduce your taxable income.
However, if you only claim charitable contributions for your itemized deductions, you likely won’t be able to deduct more than your standard deduction, unless you donate a lot of money. Keep in mind too that the IRS limits your deduction to no more than 50% of your AGI and in some circumstances 20% or 30% (for property and capital gain donations).
Know whether you can take it
The tax deduction probably isn’t your sole motivation for donating to charities. But when taking that into consideration, you may find that the contribution doesn’t actually give the tax break you might have thought.