Charitable contributions are a traditional method of lowering taxable income for many people along with HSAs and IRAs. While they can be a great way save money on taxes, there are a few things that need considering before donating.
Know the limits on what you can contribute.
Total donations between 20-50% of your annual income can be filed as deductions. Cash donations only apply towards organizations that qualify under regulations set forth by the Internal Revenue Service.
Contributions to individuals, contributions when you receive something in return, or time and services rendered are not able to count as a deduction. Non-cash donations are donations such as clothing, land, and other property.
Donating to charities can not only save you money on taxes, but can actually lower your tax bracket. This is particularly helpful if you get a raise and make enough money to get you bumped into the next tax bracket.
Here is a brief representation of the current tax brackets:
While there are stipulations and additional taxes at most brackets, this is a short overview. Let’s say you make $50,000 a year. The current tax bracket shows that you’ll pay 10% on the first $9.325, 15% on the next $28,625, and then 25% of the remaining $12,050 to reach your annual salary.
If you donate 20% of your income to charity, your taxable income will drop to $40,000 which means you are only paying $2,050 in the 25% tax instead of $12,050. That’ll save you about $2,500 in taxes.
Before you start signing checks and handing over clothes, check out the infographic from Investment Zen for the details.