How Does Donating to Charity Save Taxes?
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Federal Itemized Deductions
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Donating money to charity can reduce the amount of income tax that you'll have to pay. Federal income tax has a standard deduction amount that every taxpayer may use without any record keeping. However, if your itemized expenses, including donations to charity, exceed the allowable standard deduction, you will save taxes by using your actual donation amount.
The total of your itemized deductions is used to reduce your taxable income. Therefore, your taxable income--the amount of income that determines the amount of federal income tax you will pay--is reduced by the charitable contribution.
State Income Taxes
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If the state you reside in has a state income tax, you may save money on your state income taxes by donating to charity. In fact, your savings may be even greater if your donation is to an approved public, community, food bank or educational charity (see Resources below). In some cases, you may reduce your state income tax burden by half of the donation to charity, not to exceed $200 per individual taxpayer. These charitable donations do not require itemization to reduce your taxes. Therefore, your donations and other expenses do not need to exceed your standard deduction to reduce your taxes; it is actually a credit instead of a deduction. That means half of the amount donated comes off from your income tax bill.
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Record Keeping
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If you want to save on your income taxes through donations that you made to charity over the tax year, you must save your documentation. Your documentation can be receipts, canceled checks, pledge cards or letters from the charities. If the donation was deducted from your paycheck through your employer, then your check stub or W-2 form may serve as proof of payment to charity. Goods and services donated should be acknowledged at their fair market value. A written statement for donations that exceed $250 in value should be received from the charity along with a statement that goods or services were not received for the donation.
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Resources
- Photo Credit Julia Fuller
