Charitable Contributions: A Good Way to Reduce Your TaxesJan 17 '02 (Updated Apr 12 '09) Write an essay on this topic.
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The Bottom Line Donations to qualifying organizations can help you to support and important cause, and save you some money on taxes.
Everyone wants to find ways to reduce their Federal tax liability. Some people will hire tax professionals and others will spend endless numbers of hours on- line, looking for ways to reduce their taxable income and the amount of Federal tax owed for the year. One popular way to reduce your tax burden is through charitable contributions. If money is given to qualified organizations, the donations can be written off of your taxable income, thereby lowering your Federal tax liability. Which Organizations Qualify? It's important to know that not all non- profit organizations will qualify for a tax write- off. Most charitable groups qualify, but it's critical that you confirm that your contribution will or will not be allowable as a tax write- off, before you hand over your check. Groups that are related to health issues and concerns, like American Diabetes Association, American Cancer Society, etc., almost always qualify for tax- exempt status, so you can feel confident that your contribution will be permitted as a deduction on your taxes. Other organizations qualify, too, but you need to investigate, before you make any assumptions. If you give to an organization that is directly involved in political lobbying, then your contribution will not be tax- deductible. For example, a group like Gun Owners of America uses its contributions directly for the persuasion of congress to support gun rights. Because of this, contributions made to this group do not qualify as a tax write- off. On the other hand, an organization like the CATO Institute does qualify as a tax- deductible organization, even though CATO is a Libertarian think tank. The reason is because the CATO Institute spends its funds on education and research, not on lobbying congress. In some instances, political groups will have both a tax- exempt foundation, and a lobbying arm as well. Gun Owners of America is one such group. If you give money to Gun Owners of America (the lobbying branch), you cannot deduct it from your taxes. But, if you give money to the Gun Owners Foundation (an educational group) you are permitted to write the deduction off of your taxes, because this foundation doesn't use its funds for lobbying. Types of Contributions: Contributions to charity do not necessarily have to be made in the form of cash. You can donate any type of tangible asset that you wish, and then write- off the value of your contribution (for qualifying organizations, of course) from your taxes. The value of your contribution is generally determined by assessing its fair market value. You need to be careful not to include sentimental value here. The IRS is only interested in the fair market value. For example, if you decide to donate your 1978 Ford Pinto to your favorite charity, you have to realize that the fair market value (which could actually be negative, in the case of a Ford Pinto!) is all that you can write- off. The vehicle might have great sentimental value to you personally, but if it's only worth $200 on the market, then that's all you can deduct from your taxes. Are There Limits to Charitable Contributions?: If you want to write- off your charitable donations, you can do so, all the way up to 50 percent of your adjusted gross income. In some instances, this limit is reduced to only 20 percent of your adjusted gross income. You need to consult with a tax advisor, if your generosity places you at this level. If you make a donation, to a qualified group, but you receive some sort of benefit in return, then your deductible amount will be reduced by the value of the benefit received. For example, it's common now to get a free book, or some other gift, to entice giving to a particular charity. One group that I frequently give to is the Advocates for Self- Government. They usually include an enticement, like a book, typically valued at about $20. If I accept the book, my contributions' tax write- off is reduced by $20. So, if I give them $50, I can only write $30 off of my taxes. Membership dues that are paid to most social organizations, country clubs, etc., do not qualify as a tax- deductible contribution because you receive direct benefits from your payment. Even if your dues are paid to an organization that is heavily involved in charity work (like Knights of Columbus) you still cannot deduct your annual dues because you gain direct benefits from being a member (like the use of recreational facilities, use of the club's hall, free invitation to social events, etc.). How Much Tax Can I Save?: Contributions to charity are a tax write- off. This means that they reduce your taxable income by the amount of your qualifying contribution. They don't reduce your actual tax by the contribution amount, as some people erroneously believe. Therefore, the tax you save is going to depend on your current marginal tax rate. If I'm currently in the 28 percent tax bracket, and my total tax- free contributions for the year total $1,000, my taxable income will be reduced by $1,000, which means my tax liability will be reduced by $280. It's possible that some individuals might give so much money to charity that the total write- off for the year drops them into a lower tax bracket. If this happens, then part of your donations will be deductible at one tax rate, and part at the other, lower marginal tax rate. Final Thoughts: Having the option to write- off charitable contributions, from your taxable income, is one of the few positive aspects of the U.S. tax code. It encourages people to give to those who are in great need of assistance, and it gives politically- motivated individuals and opportunity to donate to their favorite cause and then reduce their taxable income and tax burden. If you are in doubt about the deductibility of a contribution, it's important that you contact the organization directly and inquire. You can call, or lookup the organization on the internet, to find out whether or not your targeted group for giving is allowable as a tax write- off. Remember that donations to groups that are directly political cannot be written off of your taxes. However, there is usually another organization that has similar goals but doesn't lobby congress that will allow you to write off your full contribution. This will allow you to give money to a cause that's important to you and save some tax money at the same time. I have always enjoyed giving money to charities and political causes that are important to me. I would give, regardless of the tax write- off provisions. But it sure doesn't hurt to get this extra bonus. Anytime I can reduce my taxes, I will gladly jump at the chance, without hesitation! For more information on federal income taxes, be sure to read the following essays: Federal Tax Withholding Federal Exemptions Short Term Capital Gains and Losses Long Term Capital Gains and Losses Capital Losses and Tax Treatment Standard Deduction Interest Income  |
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