It's a tax-deductible donation....

Factual Questions
1

Since I’m presently living on a graduate student’s stipend (read: very small), I’ve never itemized my income tax deductions (the standard deduction is far greater than the most fantastic itemized list I could create), but I do understand the basics of how the system works. At least, I think I do.

Charities, I keep hearing, claim as their lifeblood the tax-deductible nature of contributions. IOW, (many) people would not make the donations they presently do if they could not deduct the amount from their taxable income.

I can certainly see why the deduction is a nice perk for somebody who was planning on giving anyway (and how it might increase the amount of the donation), but this is often spoken of as the reason to give in the first place, and this is what I don’t see. You can’t actually save money by donating to charity, can you?

OK…making numbers up, say I have an income (after whatever other non-charity deductions I have) of $50,000, and my tax rate is 20% (I’m assuming a flat tax). My tax owed for the year would be $10,000.

But, if I decide that I can/should give $5000 to the United Way, or whomever, I can take that as a deduction, right? My taxable income would then be $45,000, leaving me paying Uncle Sam $9,000.

In the above example, I’m out $10,000 (all to the govt.) if I don’t donate, and $14,000 ($5000 to UW, $9000 to IRS) if I do. Yeah, I’ve reduced my taxes by $1000, but at a “cost” of $5000.

Are there really that many people out there who feel that “I’d rather give $5000 to some random charity than $1000 to the gummint!”? Or am I missing something crucial here?

To clarify my question: I’m not questioning why people choose to give to charity, or why the tax deduction is nice - a little “reward” for altruism. I’m asking if there are any circumstances in which these donations can wind up being, ah, not so altruistic (ones saves more in taxes than one donates).

2

I think you got it right there. You’re right that you can’t actually save money by giving to charity, but many people do enjoy screwing over Uncle Sam, especially if it’s for a good cause.

As for the charities themselves, I don’t see any making tax-deductability the only reason to give; I think it’s basically a perk. They realize that the people who are going to give are going to give anyway, and this is Yet Another Reason to do so, and maybe give even more.

3

Yes. We don’t have a flat tax. The charitable donation in question could well be just enough to drop the indivdual into a lower tax bracket. By itself it might not be enough to do so, but in combination with mortgage interest deduction, unreimbursed medical expense deduction, etc, it might be the proverbial straw. That next lower tax bracket might then be enough of a savings to make up for the charitable donation and then some.

4

sewalk, even though we don’t have a flat tax, that’s not quite how tax brackets work. The increased rate is only for the amount that falls within that bracket.

An example using the real rates (from here):

Let’s say you are single and make $65,000 a year (AGI not including charitable contributions). That places you in the 31% tax bracket. But only the portion of your income between $65,000 and $63,551 is taxed at that percentage. The portion from $63,551 to $26,251 is taxed at 28%, and the portion below that is at 15%. Your total tax is $14,831, (which is an effective tax rate of only 23%). Giving away $2000 to charities would drop you into the 28% tax bracket, and would decrease your taxes to $14,228. So a $2000 loss in income gains you a $600 gain in your taxes, for a net loss of $1400. So you’re not making money on the deal.

5

No, you are missing something. I believe you have a common misconception about the American tax system.

Whether it’s a flat tax or a marginal tax rate is irrelevant. You will only save a percentage of what you give. Period. The Tax brackets are marginal. Doing the math with a flat tax is simply easier.

Example:

Tax bracket 1= 0 - $50,000: 10%
Tax Bracket 2= $50,000 - $100,000: 20%

If I make $100,000 my tax is as follows:

50,000 x .10 = $ 5,000
50,000 x .20 = $10,000 Total Tax = $15,000

Now I deduct 25,000 from my taxable income. I pay:

50,000 x .10 = 5,000 Plus 25,000 x .20 = 5,000 Total Tax = $10,000

$5,000 in taxes saved at a cost of 25,000. Lets say that this is my “given” deduction, mortgage interest and all.

Now I give an extra, say, $25,000 to charity, now my taxable income is 50,000:

50,000 x .10 = $ 5,000 Total tax.

Extra saving: $5,000 at a cost of $25,000
If we up the charitable contribution to 50,000 then our taxable income is 25,000:

25,000 x .10 = $2,500. We’re now well into the 10% bracket and now save $7,500 at a cost of 50,000.

Even if we knock our tax down to 0 by giving the rest of our income to charity, we end up saving an extra $10,000 in taxes by spending an extra $75,000. You can never get ahead this way. You will NEVER save more money than you spend this way. never.

So why give to charity? Well, if you’re a regular American you give to charity because that’s what many regular Americans do. Observant Catholics give each Sunday and I know of folks who give up to 10% of their income to their church. Regular Americans who own a house can add this expense to their deducted interest income, union dues, medical expenses etc.

Rich Americans, on the other hand . . .

Lets say I bought a Picasso in 1980 at $100,000.00. It is appraised this year at $1,000,000.00. I want to get rid of it. Well, I can sell it and pay taxes on the $900,000 I make in capital gains when I sell it or . . .

I can give it to a museum and deduct $900,000 from my taxable income. I look like a great guy and I saved myself a bunch of money. Pretty good, eh? Plus, If I paid those taxes, some of that money might have gone to those poor people and who wants that? They can enjoy my painting for free at the museum!