I got a question over the weekend about a tax scheme that simply doesn’t work. But this year isn’t unique. Every year this confusion seems to come up. Let me jump right into it.
If you owe $5,000 in taxes, can you instead pay the $5,000 to a nonprofit, 501 (c) (3) charity?
Sure, you can, but you still have to pay the taxes. You don’t get a one for one choice of paying charity or taxes.
Here’s how it works. And it IS different for 2020, so you’ll want to pay attention to a little change.
Let’s assume you are at the 22% federal tax bracket and currently take the standard deduction. For 2020, that amount is $12,400 if you file single and $24,800 if you file married filing jointly.
In 2020, you’re allowed to take up to $300 of charitable donation “above the line.” You can take the standard deduction and still get this extra donation deduction.
At a 22% tax bracket, your $300 donation would save you $66 in taxes. If you owed $5,000 in taxes, you’d pay $4,934 instead. If you donated $5,000, you will still only save $66 in taxes and you’ll pay $4,934 in taxes.
Now, let’s make the same assumptions but assume you itemize your deductions. That means your itemized deductions for state tax, real estate tax, mortgage interest and charity is over the standard deduction amount.
If you add another $5,000 charitable donation, you will save $1,100 in taxes. That means your tax will be $3,900.
How much will a charitable donation save you?
It depends on two things: whether you itemize your deductions or take the standard deduction and what your tax bracket is.
One thing is for sure, though, if you owe taxes, you don’t get a choice of paying that amount to a charity or paying that amount to the IRS. The charitable contribution may be a deduction but not one for one. It’ll be based on the amount and your tax rate.
And, unfortunately, there are a lot of crooked charities out there. Make sure a charity is registered as a real nonprofit. You can search here: https://www.irs.gov/charities-non-profits/tax-exempt-organization-search
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