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Donations and Tax Season: What That Means

February 11, 2016

The holiday season is one of the most important times of the year for charitable giving. USA Today notes that roughly 34% of charitable donations in the United States each year occur during October, November, and December. Of those donations, roughly 18% are given in the month of December alone. As you prepare your charitable donations during the holiday season, take a moment to consider what that means for the upcoming tax season in the new year.

Donations Reduce Taxes, but not Immensely

For every charitable donation you make, you are allowed by the IRS to reduce your taxable income. However, the reduction is not as substantial as many people expect. The most important thing to understand is that, in most cases, you cannot claim $1 in reduction for every $1 you donate to charity. For example, let's say you donated an old automobile to charity. Time magazine points out that you can only claim a deduction for the amount the nonprofit brings in from selling your car, even if that sale doesn't generate the true value of the vehicle. In this case, you might donate a vehicle worth $1,000, but if it is sold for $850, you can only claim the $850.

Understand Income Taxes before Donating

The amount of income taxes you pay each year is based upon income, which is calculated by income tax rate tables and these differ based upon your marital status. For example, an individual pays a certain percentage in taxes for each income bracket they fall into. The standard deductions you claim on your taxes from the government reduce your total taxable income for the year.

So, an individual who makes $50,000 and receives a deduction of $5,800 as an individual taxpayer has a taxable income of $44,200. This deduction lowers that individual's taxes from $8,625 for the year to $7,175, for a savings of $1,450. Charitable donations work in a similar fashion when it comes to determining the amount of savings.

How Charitable Donations Work

For every dollar you donate or goods you donate with a monetary value to a registered charity, and it must be a registered charity, you earn a deduction on your taxes that is similar to the standard deduction. You can choose to subtract the standard deduction from your income or the sum of your charitable donations.

Consider an individual who donates $9,000 to a church or local charity. If that individual has the same $50,000 income as above, their taxable income is now $41,000, which means they owe $6,375 in taxes to the government. The savings in this case is $2,250, which is superior to the individual income deduction above.

In this case, the individual is better off taking the deduction of charitable donations over the standard deduction. The actual benefit of charitable giving in this case is the difference between the value of savings from the standard deduction ($1,450) and the value of savings from the charitable donation ($2,250), which equals an even $800 positive in favor of the charitable donation.

How Best to Donate

Donations are best used in concert with other deductions on your year-end taxes. For example, coupling your charitable contributions with home mortgage interest deductions for qualified homeowners. Linking back to the first point, your tax bill is often reduced through charitable donations by $.25 for every $1 you donated throughout the year.

It may not be a huge bonus for your taxes at the end of the year, but it does offer you valuable savings while also benefiting society as a whole. For specific tax advice please consult a qualified tax professional.