Help me understand math. How does donating to charity reduce my taxes?

Ask an advisor: help me understand math.  How does donating to charity reduce my taxes?

Ask an advisor: help me understand math. How does donating to charity reduce my taxes?

If you give $50,000 in cash to charity, does that reduce your adjusted gross taxable income (AGI) by $50,000? So if my adjusted gross income was $100,000, and I gave $50,000 to charity, is my taxable income now $50,000?

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to prepare Charitable donations It gives you the opportunity to do good and get a valuable tax deduction.

In the case of an adjusted gross income (AGI) of $100,000 with a cash donation of $50,000, you can probably deduct $50,000 and reduce your AGI to $50,000.

But because we’re dealing with US tax law, the real answer is: It depends.

It’s not always as simple as “donate x dollars and get x dollars in tax deduction”. But when you support charitable organizations, you’ll usually see a tax advantage. As long as you follow the rules, that is. Here’s what you should know.

For help with strategies for taxing charitable giving, consider Work with a financial advisor.

Ask an advisor: help me understand math.  How does donating to charity reduce taxable income?

Ask an advisor: help me understand math. How does donating to charity reduce taxable income?

What donations can you deduct?

Deductible charitable donations are not limited to cash. You can too Asset donation Anything from used children’s clothing to artwork to cars. In addition, when you volunteer to do charitable work, your related personal expenses may also be deductible. The rules are a bit different for assets and volunteer donations, so be sure to follow them to get the full deduction allowed.

For asset donations, follow these guidelines:

  • Determine the fair market value. Basically, this is the amount you can reasonably sell your donations for on the donation date.

  • Make sure donated household items are in good used condition or better before taking the discount.

  • Get a signed official appraisal if the asset you’re donating is worth $5,000 or more. You can find more details at IRS 561 Publishers.

With volunteer-related deductions, you can include unreimbursed expenses you paid but not your time or the value of your service. You can deduct things like travel expenses when you volunteer away from home, snacks you served during an event and the cost of uniforms you must wear while volunteering.

If you use your car while volunteering, you can deduct directly related expenses — such as gas — or use a 14-cent-per-mile deduction. Be sure to save any relevant receipts and obtain documentation from the charity you’re volunteering for, which is required to deduct $250 or more.

If you are ready to match up with local advisors who can help you achieve your financial goals, then let’s start.

Follow the laws

Like everything related to the IRS, there are several rules to follow when taking it Deductions for charitable donations. Here are four important things to keep in mind:

  • Make sure the charities you donate to are IRS-eligible before taking any deductions. You can Visit the IRS website To see if the organizations you support qualify.

  • Know the discount limits. For the 2022 tax year, the deduction for cash donations is usually limited to up to 50% of your AGI, although the limit may be lowered in some cases. You can also deduct up to 30% of your AGI for non-cash donations if you’ve held these assets for at least one year. If your donations exceed these limits, you can carry forward the deductions on your tax returns for the next five years.

  • Keep records of your cash donations. For donations of $250 or more, obtain a written receipt from the charity that expressly states the monetary gift amount or a description of the donated property. This acknowledgment must also include the value of any goods or services you have received from the charity in return.

  • Submit appropriate forms when needed. If you donated property worth at least $500, you must include IRS Form 8283 as part of your tax return. If necessary, attach any evaluations related to donations.

You will have to detail to get the discount

Unlike last year, you will need to Detailed discounts on Schedule A to include your donations on your tax return next tax season. And with record high deduction amounts for the 2022 tax year, many people won’t end up detailing. These standard deductions, depending on your enrollment status, are:

  • Single: $12,950

  • Joint filing by spouses: $25,900

  • Head of household: $19,400

If your itemized discounts are lower than the standard discount, you can use a aggregation strategy to push them over the line. That means making quick payments into 2022 that you would normally make in 2023. This way you can itemize tax year 2022 and take the higher standard deduction for tax year 2023.

This is what it looks like:

Let’s say you normally donate $5,000 each year to charity. In 2022 you will donate $10,000: This year’s and next year’s donations combined. This double donation pays your itemized deductions on this year’s standard deduction for an even greater reduction in your taxable income.

Charitable giving strategies that increase tax savings

Ask an advisor: help me understand math.  How does donating to charity reduce taxable income?

Ask an advisor: help me understand math. How does donating to charity reduce taxable income?

Depending on your personal situation, you may be able to use advanced strategies for greater tax savings. Be sure to consult a tax preparer before making any of these more complicated moves.

Use of the Donor Fund (DAF). These funds can work particularly well with a pooling strategy. with daf, you make a large tax-deductible contribution in one year to maximize itemized deductions for that tax year. You can distribute the money in the DAF to different charities over the next few years as you normally would. You only get a tax deduction when you fund the DAF, not when the DAF distributes the money to organizations.

Donate estimated assets. When you donate directly an appraised asset — for example, stock — you get two additional benefits. You avoid paying the capital gains taxes that would apply if you sold the asset. And you still get a charitable donation deduction to reduce your tax bill.

Make an eligible charitable distribution If you are at least 70 and a half years old, you can file Qualified Charitable Distribution (QCD) Up to $100,000 directly from your traditional IRA to the charity of your choice. These donations will not be deducted, but you will still get a tax advantage. They count toward required minimum distributions (RMDs) but won’t increase your taxable income the way regular RMDs do. Reduced taxable income means a lower tax bill, which may help you avoid paying taxes on your Social Security benefits.

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There’s more to deducting charitable contributions than simply taking a gross dollar reduction from adjusted gross income. The rules can get complicated, so consult a tax professional to make sure you’re getting it right.

Michelle Kagan, CPA, a columnist for SmartAsset financial planning and answers readers’ questions on personal finance and tax topics. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Michelle is not a participant in the SmartAdvisor Match platform and has been compensated for this article.

Find a financial advisor

  • Finding a qualified financial advisor doesn’t have to be difficult. Free SmartAsset tool It matches you with up to three financial advisors serving your area, and you can interview your own advisors at no cost to determine which one is right for you. If you are ready to find a counselor who can help you achieve your financial goals, let’s start.

  • Tax refunds are a great financial boost. Whether you plan to save for retirement, pay off college or credit card debt, or invest your money differently, SmartAsset Tax return calculator It can help you figure out how much you will get back from the government so you can plan ahead.

Photo credit: © iStock.com / Vladimir Vladimirov, © iStock.com / FilippoBacci

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