Do charitable contributions really save you money on taxes?

Question

If I make a donation to a charitable organization, am I actually saving myself any money? If I donate $500 in the course of a year I'm lowering my taxable income by $500 and saving the $100-$150 in taxes I would have paid on that money. But I'm still out that $500. Am I wrong in thinking that donating for the sake of saving on my taxes is pointless?

Now I do realize donations should be done out of kindness and really should be done without consideration of the tax implications. I also realize that donating in the form of used items is probably the better way to go from a tax savings standpoint.

Answer 1

You make two points worthy of comment. Firstly, you have paid a net (lets say) $400 but the charity gets the benfit of the full $500. The IRS has given you $100 for your kindness. If there were no tax relief you might only give $400 so the charity has less money.

Secondly, donating in kind is problematic nowadays. Far too many people were abusing the rules. For 2007 onwards, donations to charity of clothes, etc have to be in "Good Used" condition. Guess who has to prove that they were?

Now, if you own stock in a publicly traded company which has appreciated since you bought it, you enjoy a double-benefit. If you donate the stock to the charity you pay no tax on the appreciation and you get tax relief (as a charitable donation) on the market value of the stock on the day you donated it. So if you bought stock for $500 and its now worth $1,000 you don't pay tax on the $500 profit, you get a deduction for the $1,000. The charity can then sell the stock and get its $1,000 - all for your $500 investment.

Answer 2

Charitable contributions will only help in lowering your income if you itemize (and all itemization's together) are more than the standard deduction. Also, the savings from your taxable income depends on your tax bracket. If you are taxed in the 10% bracket, then a $500 donation will save you $50 in taxes. If you are in the 25% tax bracket, it saves you $125.

But I think you are missing the point of donations - it should not be thought of as a tax benefit, but a benefit of the organization that receives the donation.

Answer 3

You are right about donations in the form of used items, that you no longer need ,being the way to go to save money on taxes but I think this only helps if you are itemizing deductions.
If you take the standard deduction allowed then it really does not help you save anything.
You could achieve better results towards becoming financially stable for yourself if you invested the $500.00 into an IRA account for your retirement. $500 in an IRA for yourself allows you to reduce your taxable income also. Then when you retire, you pay tax on the distribution of your money, you will probably be in a lower tax bracket when you retired and then will pay less tax. The limit on deducting IRA contributions is thousands of dollars a year, occasionally it does go up, so check with someone at a bank. The bank can also tell you the details between an IRA and a Roth IRA. You can get either one at a bank if you earn money.

Answer 4

No, you're not wrong. The tax savings, assuming you already have enough deductions to itemize, are the amount of the donation times your tax bracket. For most people unless they're pretty high income, the savings would be less than the $100 to $150 you mention.

And donating used items has its own set of rules on whether you can deduct them at all, and still only get you the same percentage of tax savings as cash donations would.

Answer 5

Yes, donations save you money if you itemize your deductions , but you don't make a profit by giving. the tax break is an added incentive to giving, but not the reason to do so.

Answer 6

Right!