The Many (Tax) Benefits Of Charitable Giving
You will want to pay attention here: Giving improves your health, happiness, and your wallet.
It’s “the most wonderful time of the year” so why not ruin it with a little talk about tax strategy, eh?
Sugar plum fairies dance in some people’s heads. My marginal tax rate and the timing of charitable contributions dance in my head.
There’s power in giving your money away. It asserts your authority. You’re saying, “I don’t need you, money! You don’t control me!” and psychologically, that goes a long way toward conquering all kinds of money fears.
Over the long-term, giving should be a pillar of your wealth-building, financial strategy. Why? It makes you happier. Just read “A Christmas Carol” one more time. Scrooge was not a happy man. (Also, there are mountains of research proving as much.)
Giving benefits the giver in many warm and fuzzy ways. It also happens to save you a lot of money on taxes. Here are a few points to remember before you curl up for a long winter’s nap.
Keep A Record
The IRS wants documentation. Document it all. When it doubt, snap a photo of that receipt and save it in your “Taxes – 2016” folder of Dropbox. If you don’t have documentation and you are audited, you’ll get dinged.
Know Your Number
Your accountant or trusty tax software should be able to give you your marginal tax rate. It’s the amount of tax you pay on the next dollar earned. Let’s say it tells you that it’s 25 percent. When you’re evaluating the impact of a charitable contribution on your taxes, you’ll multiply the amount you’re giving by your marginal tax rate.
In other words, when you give that $100 (with documentation to back it up), you’re saving $25 in taxes ($100 * 25%).
Beware of Phaseouts
Your accountant should certainly help you strategize around these situations, but if your income starts becoming even modestly high, certain tax benefits begin phasing out. This can make your marginal tax rate actually much higher than what you might initially expect.
Phaseouts are complicated (taxes!) and confusing (taxes!) and very real when it comes to the bottom line on what you’ll pay. Make sure you’re asking your accountant all about them, or probing into your tax software to the extent possible to make sure you’re not missing some opportunity to significantly lower your taxes with a little bit of maneuvering.
Yes, in the end, giving feels great. It will benefit you in so many ways. If, however, it can also benefit your wallet? Well hey, that’s just responsible money management.