In this world nothing can be said to be certain, except death and taxes!
I like to think that charitable donations are certain, too. I mean, you want to support causes you care about, right? You want the world to be a better place, right?
Well, if you’re donating to charity you may have questions about how making charitable donations impacts your taxes. Me, too. That’s why I was very excited that Megan Wells broke it all down for me. Definitely pop over to her site to check out the infographic she refers to. It’s very comprehensive covering topics like what can be deducted, what can’t be deducted, and what documentation you’ll need.
Charitable contributions are a popular way to lower taxable income for many alongside HSAs and IRAs. Before rushing to your checkbook to send off a check to your favorite charity, there are a few key factors to know beforehand.
Know how much you can give and deduct. Total donations between 20-50% of your yearly income can count as deductions. Cash donations only apply towards organizations that qualify under rules and regulations set forth by the IRS. Donations made to individuals, donations made when you receive or expect something in return, or giving away your time are a few things you can’t file as a deduction. Non-cash donations are donations such as clothing, land, and other property. You’ll need detailed records of the fair market value to deduct these items.
Donating to charities can do more than just make you feel good. Depending on your current income, it can actually lower your tax bracket. This is more helpful if you receive a raise and make enough money to raise you to the next tax bracket.
Here is a brief overview of the current tax brackets:
10% – $0 to $9,325
15% – $9,325 to $37,950
25% – $37,950 to $91,900
28% – $91,900 to $191,650
33% – $191,650 to $416,700
35% – $416,700 to $418,400
39.60% – $418,400+ $121,505.25
While there are provisions and extra taxes at most brackets, this is a brief overview. Let’s say you make $50,000 a year. The current tax bracket displays that you’ll pay 10% on the first $9.325, 15% on the next $28,625, and then 25% of the remaining $12,050 you make to add up to your annual income.
By donating 20% of your annual income to charity, your taxable income will fall to $40,000 which leaves you with only paying $2,050 in the 25% tax bracket instead of $12,050. That’ll save you about $2,500 in taxes a year.
Before you head to the bank and start handing over your old clothes, check out the infographic from Investment Zen for the more details.