Help me understand a tax deductible donation means exactly?
Help me understand a tax deductible donation means exactly?
I've always been curious about what exactly a tax deductible donation does to your taxes. For example, let's say I earned 20,000 in 2005 and owed $5,000 in taxes, a 25% tax rate. Let's go back in time and say I had given $2,000 to a tax deductible charity. Would my total income be reduced by 2K to bring it down to $18K and then at a 25% rate I would have owed $4,500 in taxes? Or would the total tax I owed be reduced, so instead of $5,000 I would owe $3,000? Am I making sense? Please help me understand! I'm in the USA. Thanks!
Answers:
Chosen Answer
NotEasilyFooled: The US federal taxes you will owe will depend on whether you itemize deductions. If you take the standard deduction instead of itemizing, you get no benefit at all for the charitable contribution. If the charitable contribution is not made by cash or check, there can also be a reduction to the amount you can deduct if your AGI is high. Assuming the contribution really is deductible, it would reduce your taxable income, so you would pay less tax. So, conceptually, in the above example, the result would be $4,500 in tax, not $3,000.
2006-05-26 20:44:38
NotEasilyFooled: The US federal taxes you will owe will depend on whether you itemize deductions. If you take the standard deduction instead of itemizing, you get no benefit at all for the charitable contribution. If the charitable contribution is not made by cash or check, there can also be a reduction to the amount you can deduct if your AGI is high. Assuming the contribution really is deductible, it would reduce your taxable income, so you would pay less tax. So, conceptually, in the above example, the result would be $4,500 in tax, not $3,000.
2006-05-26 20:44:38
Jeff S: The prior answer is correct. A tax deductable donation reduces your total income, not your income tax owed. It is important because people were donating junk worth $50 and claiming a fair market value of $50,000. Instead of taking down their income by $50, they deducted $50,000 and probably claimed that they did not owe much tax since that is more than most people make in a year. In another example, some people would start a fake charity and donate their stuff to it. Although they were still using it, they were claiming it was tax deductable even though it was not. IRS rules require a tax deductable donation must be made to specially designated non-profit corporations.
2006-05-26 21:03:58
2006-05-26 21:03:58
Legally Modest: your first answer is correct, reducing your tax by 25% of your donation, to $4500
2006-05-26 23:26:40
2006-05-26 23:26:40