About Tax Deductions for Charitable Contributions
Tax season is a time many people dread, especially those who know they will have to pay the government more taxes instead of receiving a refund check. Tax deductions are expenditures that the government allows an individual to subtract from her taxable income, reducing the amount of tax owed. One of the most prevalent and well-known tax deductible expenses is charitable giving.
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Identification
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Some people think that giving a large gift of money to any organization, or even individual, denotes a charitable contribution. While this may be true semantically, according to the tax code, only donations made to organizations that are non-profit, tax-exempt entities, can be deducted from taxes. Some common organizations that usually conform to the tax code as charitable contributions are religious institutions, organizations working to promote well-being around the world and the government itself.
Function
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A tax deduction for charitable giving is a below the line tax deduction, meaning it is subtracted from the taxpayer's adjusted gross income when determining final taxable income. Charitable giving is added up with all others below the line deductions, to determine the amount of tax owed; a standard deduction amount may be used in lieu of of charitable giving and other itemized deductions, which for many taxpayers, will yield more savings. Basically, the more money that is given to charity, the smaller the the amont available for the government to tax.
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Benefits
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Tax deductions for charitable giving are beneficial to the giver because they save tax money, but they are more beneficial to the non-profit organizations that receive the gift. Many organizations rely on donations to continue their operations. Because such giving is tax deductible, it allows them to raise far more money than they would be able to if their benefactors were not giving at a discounted rate. As a result, many worthwhile nonprofits are able to stay in business due to the charitable giving deduction.
Size
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There is a limit to the amount of tax deductible income that can be donated to charity, which is 50 percent. Any income donated beyond 50 percent cannot be deducted from taxes. A person who pays 40 percent in taxes will save $40 for every $100 given in the form of charitable contributions. Someone in a more average tax bracket might only save $20 per $100 given as charitable contributions. This may seem to contrast with the progressive scaling of the tax system, in that the rich save more by giving to charity, but the progressive scaling itself is reason the disparity exists.
Misconceptions
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Perhaps the most common misconception about charitable giving is that any gift made results in tax savings equal to the amount given. Instead, this is a tax credit, meaning the tax itself is reduced by the amount of the donation, rather than a reduction of taxable income. Another misconception is that a charitable gift can always benefit the taxpayer if they remember to claim it on tax day; only if the size of charitable contributions and other itemized deductions exceeds the standard deduction will charitable contributions benefit the tax payer. Often, a middle income worker that gives a couple hundred dollars to miscellaneous causes will not benefit from them in the form of a tax deduction.
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