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Can anyone explain a tax write-off?

G

GigaCluster

Golden Member
Many non-profit organizations are soliciting a donation, claiming that it's tax-deductible or whatever. Exactly what does that mean? Does it mean that if I donate a thousand dollars, the government will reimburse me or that I won't have to send that thousand to the government? If not, then what?

If I am correct, then why doesn't everyone donate if you don't ultimately lose money?

Please explain.
 
Let's say you make $100k/year. You pay 50% taxes which leaves you with $50k/year after taxes. If you give the charity $2k of the money in your pocket (ie you've already paid taxes on it) you can claim that as tax deductible. Thus instead of being able to be taxed on $100k/year you are now taxable on 100-2 = $98k/year. Since your tax rate is 50% you end up with $49k in your pocket (when you get a tax return or whatever). So you've given a charity $2k to them but to you it's only actually cost you $1k.

You're essentially paying them with not after tax money ($.50 for every dollar you make), but before tax money ($1 for every $1 you make since no taxes taken out yet). For somebody in a high tax bracket a tax write off is more significant than somebody paying only 20%.
 
I think in order to write stuff off you have to itemize your taxes at the end of the year.

This means keeping receipts for EVERYTHING in order to itemize.
 
Of course you're going to need to itemize your deductions instead of taking the standard deductions to use it. I don't do that yet myself so...
 
Originally posted by: Skoorb
Let's say you make $100k/year. You pay 50% taxes which leaves you with $50k/year after taxes. If you give the charity $2k of the money in your pocket (ie you've already paid taxes on it) you can claim that as tax deductible. Thus instead of being able to be taxed on $100k/year you are now taxable on 100-2 = $98k/year. Since your tax rate is 50% you end up with $49k in your pocket (when you get a tax return or whatever). So you've given a charity $2k to them but to you it's only actually cost you $1k.
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Is it possible to squeeze your income down into the next lower bracket and actually make money on the donation?
 
Originally posted by: Soybomb
Of course you're going to need to itemize your deductions instead of taking the standard deductions to use it. I don't do that yet myself so...
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That's true too. You can't itemize AND do standard deductions, so until your itemized deductions are higher than your standards (I know mine are not) you can't really claim a charity as a tax write off to any benefit.

 
Originally posted by: yamahaXS
Originally posted by: Skoorb
Let's say you make $100k/year. You pay 50% taxes which leaves you with $50k/year after taxes. If you give the charity $2k of the money in your pocket (ie you've already paid taxes on it) you can claim that as tax deductible. Thus instead of being able to be taxed on $100k/year you are now taxable on 100-2 = $98k/year. Since your tax rate is 50% you end up with $49k in your pocket (when you get a tax return or whatever). So you've given a charity $2k to them but to you it's only actually cost you $1k.
Click to expand...


Is it possible to squeeze your income down into the next lower bracket and actually make money on the donation?
Click to expand...
I'm no expert but I'd doubt it. Remember also that if you're making $40k/year at 20% tax and if you make $41k year you're now at 25% tax you will still bring home more money. The reason being the first $40k is at 20% and the next $1k is at 25%, so it's a misnomer to say that you want to stay at a certain income level to keep your tax bracket low.

Exceptions to that occur when you're doing things like paying taxes on capital gains which are paid based on the highest amount of taxes you pay. So let's say you made $1 million in the stock market. In that case you're going to want to be making the $40k salary instead of $41k because the second will force you to pay higher taxes.

At least I think that's how it all works 🙂 And in some cases people do play around with donations to things like a 401k just to lower their tax bracket if it needs a small bump to avoid paying out large taxes on a capital gain.

 
Okay, thanks, guys. So, the more taxes I pay to the government, the easier I can donate because the less "hard cash" I spend. Correct me if I am wrong.
 
Heres a simple answer for you.
Its USELESS for most of us out there.
The "you can use it as a tax writeoff" sounds good to get people to donate.

Most of them have already answered for you.
You either use the "itemize" or the "standard deduction"
Most most us will use the standard deduction as it was $4700 for single in 2002.
People who "itemize" are people with houses and accrue alot of interests.

So lets say in a particular year:

mortgage interest- $2000
losses(say from investment)- $2000
donations- $2000

So from just those 3 items, the total is $6000 and you would use the $6000 as a deduction from your income instead of using the standard deduction.
 
I don't get it, folkses; I will ask someone in person and have them explain it to me "interactively". Thanks anyway -- I am sure this thread cleared something up for someone.
 
Originally posted by: GigaCluster
I don't get it, folkses; I will ask someone in person and have them explain it to me "interactively". Thanks anyway -- I am sure this thread cleared something up for someone.
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If you itemize, then donate your used clothing and stuff that you no longer need or use. You can donate up to 400 or 500, I believe, without having a reciept. So if you do that your taxes decrease by 180 or so. I'm not sure about the donating to get into a lower tax bracket. I'm not sure if the tax brackets are stepped up or if they are gradual brackets. For example,, if your AGI is 65k and that is taxed at 33% but if you could lower your AGI down to 63k where the tax burden is 28%, the difference would be around 3800 (21450-17640) minus the 2000 you donated would give you 1800 profit. That's how I would think it would work if it was stepped. If it was gradual where 2000 in donations would change only .5% then you probably would only get 700 dollars less tax, and that would mean you paid 2000 to get 700 dollars of you taxes.



KK

 
LOL, let me try to simplified more for you.

This is a simplified tax form at the end of the year.

Income(your gross income)
- MINUS Itemize OR Standard deduction(which ever is higher)
- MINUS Number of exemption
= Taxable Income

The whole point is to get you TAXABLE INCOME as low as possible.
The lower your Taxable Income, the less taxes you have to pay for the whole year.

Lets say if you made $10,000 for the year.
And you donated $8000 worth of stuff(I'm exaggerating)
So you would take the $10000-$8000-exemption = your Taxable Income.

Where as if you didn't donate anything you would have:
$10000-$4700(standard deduction)-exemption= your Taxable Income.

So you see if you were able to donate enough stuff to make it higher than $4700, you can use it as a TAX WRITE-OFF.
Of course the ITEMIZE part contains more than just DONATIONS.

Simple enough for you ??

 
Tax deductions are a lot more beneficial to people with high incomes, business owners, or those with large amount of taxable gains.

To the average joe they don't help ALL that much.
 
Originally posted by: amnesiac
Tax deductions are a lot more beneficial to people with high incomes, business owners, or those with large amount of taxable gains.

To the average joe they don't help ALL that much.
Click to expand...

I would bet the vast majority of homeowners itemize deductions. Mortgage interest, real estate taxes, state income taxes, and contributions all count towards itemizing.

And to an earlier question, you can't "profit" from a contribution no matter how you try. The tax brackets are incremental. For the first $X of taxable income you pay nothing. On the amount from $X to $Y you pay 15%, on the amount from $Y to $Z you pay 28%. So even if your taxable income was barely above $Z, and you make a contribution to knock it down under that, you'll save the tax (28%) on that amount, but that's all.
 
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