With talks about capping or even eliminating the charitable contribution deduction from the tax code, it’s important to remember that from where we sit right now, it makes sense to donate to charity for any itemizing taxpayer. Here are a few reminders and things to consider when donating to charity.
You’ll pay less income tax
This one sounds like a no-brainer, but remember that the cost of donating a dollar to charity is not actually a dollar. The actual cost of the contribution is reduced by the amount of tax savings (up to roughly 40 percent for some taxpayers). This means that the taxpayer is footing part of the bill, and the government is footing the other part.
But I thought my charitable contributions were limited in some way
There are “limits” to charitable contributions…several kinds of limits, in fact. Based on what you’re giving — cash, non-cash, appreciated securities, etc. — certain limits may apply on how you reduce your income.
There are also limits based on what type of organization you’re donating to. For instance, most organizations fall under the 50 percent adjusted gross income (AGI) limit. This means that your charitable deduction can’t be more than 50 percent of your AGI for the year.
Lastly, in 2013, high-income taxpayers started losing a portion of certain tax deductions. A good question to ask your tax preparer is, “Are my itemized deductions being limited because of my AGI level?” This limitation can be confusing and, on the surface, may lead to wanting to donate less to charity. But remember: your AGI is the important number in calculating how much of your tax deductions are lost — not the amount of your tax deductions themselves.
Donate now while the tax deduction is “guaranteed”
With a good tax projection each year, your tax preparer should be able to tell you exactly how much tax you could save based on your income and the other items on your tax return. By donating now, you know what the true economic cost is. By waiting until a future year, it’s nearly impossible to know what’s going to happen to tax rates and the charitable contribution deduction.
There are many reasons to donate to charity, from leaving a legacy to the validation that comes from helping a good cause. It feels good to know you’re helping others. It feels even better knowing you’re saving taxes in the process.