The link above is to an article I wrote about US taxes and charitable giving. This is a complicated topic, so I thought I'd do some heavy lifting for everyone. This is also the time of year when it's particularly applicable. If you have any questions, feel free to ask here or on Medium.
The article is pasted below for convenience (images and formatting may be better on Medium. Also, I'm more likely to consistently update the Medium article if I find corrections, so please read below only if you're trying to get a feel whether you want to read further and click on the article):
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There’s a reason why everyone waits so long in the year for their giving. Taxes.
Here’s my effort to get you to minimize your taxes while you give. This only applies to US law. I have no idea how other countries do this. I hope it’s way easier. The simplest way would be having a tax system that emphasizes a broad base and low rates as outlined in the book A Fine Mess (I don’t get any money for this link, but it’s a tax book that you can actually read).
A Few Words About Deductions
We’re going to break this down into two categories. Above-the-line deductions and below-the-line deductions. Above-the-line deductions apply to everyone. The easiest above-the-line deductions are related to placing funds into special retirement accounts or health savings accounts. Another, which we’ll talk about later, is tax-loss harvesting. Tax-loss harvesting is selling investments at a loss and taking a deduction.
Below-the-line deductions only apply if you can get your total below-the-line deductions to exceed your standard deduction (over $12K in 2020 for those filing as single, doubled if filing jointly). If you do below-the-line deductions, you do what’s called itemizing.
Unfortunately, charitable donation deductions are only for those who itemize (though there are still some benefits to non-itemizers who donate appreciated assets). Typically, itemizers are folks who own a home or run their own business and can rack up deductions. But there are other ways to fall in this category. You can find the entire list of below-the-line deductions buried in the US tax code.
For clarity, a deduction is a way to reduce your adjusted gross income. Reducing your adjusted gross income means less money you get taxed for at your highest tax bracket. A deduction is different than a credit, a credit meaning you get a straight-up cash return. Because deductions are based on a progressive tax bracket, deductions are more beneficial to those in upper tax brackets with higher incomes. This makes it a regressive benefit.
Your adjusted gross income also interacts outside of taxes. This includes interactions like how much your monthly student loan repayments are.
Charitable Gifts And Below-The-Line Deduction Limits
You can only itemize 501(c)3 nonprofit charitable deductions. But your max deduction will vary based on two elements:
1. Whether the 501(c)3 (a type of nonprofit) is a public charity or a private foundation.
2. Whether you’re giving cash or an appreciated asset.
Public Charity Vs Private Foundation
If you’re giving to a public charity, then you can deduct up to 60% of your annual gross income (special limitations given to capital gains gifts discussed later). If you’re giving to a private foundation, then you can only give up to 30%. Private foundations tend to have concentrated funding. You often see family foundations classified this way.
If you’re not sure which classification your favorite charity has, you can look up their 990. If you see their 990 has a 990-PF at the top left of the form, then they’re a private foundation. If it just says 990, then they’re a public charity.
There are many exceptions to the limit rule that I won’t go into, which apply when giving to certain kinds of charities or giving with particular personal property assets.
Giving Appreciated Assets vs Cash
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