How to Keep Money in your Pocket through Charitable Donations
The government taxes us on all of our taxable income, but there are several perfectly legal and even encouraged ways to “cheat the system” by doing things like adding money to your retirement account, contributing to your HSA or FSA, and deducting things like home-office equipment and vehicle costs. Additionally, you can donate to tax-exempt organizations (non-profits) and this will lower your total taxable income if you do it the right way. Today, we’re going to talk all you need to know about charitable giving and taxes.
Okay, so how does this work?
Typically, you can deduct a portion of your adjusted gross income through charitable donations, usually up to 60%. However, the percentage you can deduct might be limited to 20%, 30%, or 50%, depending on the type of contribution and the organization you're donating to. Your adjusted gross income (AGI) is your gross income (pre-tax salary) minus any adjustments to your income such as retirement contributions, student loan interest, etc.
Let’s look at this example…
Gross Income: $100,000.
Retirement Contributions: $12,000
HSA Contributions: $3,000
Student Loan interest: $400
Because those other numbers lower your taxable income, your adjusted gross income goes from $100,000 to $84,600… which also brings you down to a lower tax-bracket!
Deducting up to 60% of your AGI in this example would mean donating up to $50,760 to a non-profit organization, and decreasing your taxable income to $33,840. And this means paying significantly less in taxes. I don’t know many normal people who can afford to donate 60% of their AGI, but it’s pretty cool that it’s a possibility.
Some Caveats…
In order to be able to deduct your charitable contributions from your taxable income, you need to itemize your taxes (which is something you can ask your tax professional about because that’s over my head) and your total tax deductions must exceed the standard deduction. In the above example, the retirement/HSA/loan deductions are already over the standard deduction for a single or married filing separately filer, so any charitable donations would count in decreasing the taxable income.
Standard Deduction for 2023:
Single or married filing separately: $13,850
Married filing jointly: $27,700
Head of household: $20,800
As it’s nearing the end of the year, it’s a good idea to evaluate your charitable contributions and make sure that number plus your other deductions is more than the standard deduction, or you can’t claim those donations. Soo…
Is there even a point if I can’t deduct the donations?
YES. Through a little something called “Bunching.” Bunching charitable donations is basically saving up your donations and giving them all at once, once you have enough. Instead of giving a little money to a charity every year, you decide to wait and save your donations for a few years. Then, in one year, you make a bigger donation that includes all the money you saved. You bunch your donations and give a larger amount that is enough to make your total deductions (including charitable donations and other things you can deduct) higher than the standard deduction. In simple terms, bunching is a way to make your generosity count more when it's time to do your taxes by giving a larger donation every few years.
This article doesn’t even begin to cover the emotional and psychological benefits of giving to organizations you believe in. Feeling like you’re a part of something is a feeling like no other. But for the sake of this personal finance blog, I’ll stick with the tax benefits of giving, and leave it to you to figure out the rest.
Happy Giving!
