Don’t Let Tax Incentives Determine How You Donate

Giving to your favorite charitable organization can be very rewarding, beneficial to the community and, (for many taxpayers) partially subsidized via a deduction on your personal income tax return. Depending on your circumstances, there are a number of ways to take advantage of tax laws to “get more bang for your buck.” But before you donate, you should always have a solid understanding of tax ramifications.

Finding a Balance

Your desire to give back to your community or to a worthwhile organization should be acted on with your personal financial health in mind. Any time you give money away, regardless of the tax incentives, your finances are impacted. Always be mindful of your financial security and understand how these gifts will reduce the funds available to you now, in your future, and to your heirs.

“I’d rather give it to a good cause than the government!” is a popular phrase, but it’s not completely accurate. Let’s say you are in the 25 percent marginal bracket (the highest marginal tax rate is about 40 percent.) That means for every dollar you give to charity, you save 25 cents in taxes. Said another way, I can give my local homeless shelter $100. After receiving my tax refund, I will have only spent $75 to do so. This means is that if you want to “give back,” the tax laws allow that person to provide $100 of help for $75 out-of-pocket.

After taking this into consideration, you might decide that, at this particular time, that giving away money is not in your best financial interest and that you’d be better off with $75 in your bank account , which would be the case if you kept the $100 and paid $25 more in tax.

Your Gift is Important

The point is: you aren’t really giving it all to a good cause instead of the government. In fact, you are usually giving up more in total than if no donation had been made. Don’t misunderstand that whatever you would pay in tax could instead be given to charity as an even trade. Once you determine that you can afford to be philanthropic, then it’s time choose a method of giving that best utilizes the tax tools available. If you are planning to make a donation, there are many options to choose from. Your gift can be made in the form of a:

  • Straight cash donation
  • Appreciated stock or other property
  • Qualified charitable donations from IRAs
  • Charitable trusts or annuities
  • Bunching multi-year pledges to maximize itemized deduction limits
  • Legacy bequests

By all means, give back. But do so with an understanding of how it will impact your financial health. Then use proper tax strategies to maximize the impact of your gift. For more information about tax strategies related to charitable giving, contact Rea’s tax team.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 7/30/2014.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.