This Christmas Season, it actually pays to not be a Scrooge!
Charities and non-profits are a great way to give to those you’d like to help, and also protect yourself from taxes.
Photo by Katt Yukawa on Unsplash
How does charitable giving affect taxes?
When doing your taxes, you can either use the “Standard Deduction” or you can “Itemize Deductions.”
If you use the Standard Deduction, it means that you’re using the dollar amount the IRS decided ahead of time to reduce the income you can be taxed on.
So, for instance, if Mary is filing as a Single person and made $50,000 in a year, she can use the Standard Deduction of $12,550 (for 2021), so she’ll only be taxed on $37,450.
The other option would be to “Itemize Deductions.” This means you would have to go through your expenses in the year for qualified deductions. Those include things like mortgage interest, and charitable giving.
You can only choose one option or the other. For instance, if Mary find you only have $2,000 in Itemized Deductions, it would be better to choose the much higher Standard Deduction from above.
In fact, most people find it easier and more beneficial to simply use the Standard Deduction. After all, let’s consider Mary’s scenario:
Filing Status: Single
Standard Deduction: $12,550
Itemized Deductions: $2,000
In order to make Itemizing Deductions the more efficient option, Mary would have to contribute more than $10,000 to charity at the end of the year. That might not be possible for her.
What’s special about this year?
However, thanks to the CARES Act in 2020, a new “above the line” deduction is available for donating to charities and non-profits.
“Above the line” means that you can take the deduction on top of the Standard Deduction.
And in 2021, each individual can deduct up to $300 in charitable cash donations.
Here’s the strategy:
Want to help make a difference in the world and also want to pay less in taxes?
Give $300 to your favorite non-profit organization before the New Year, and you will also be decreasing your taxes in April!
That is a win-win!
The name of the game is tax-efficiency, and it can be hard to understand and implement on your own. This is where a financial advisor can help you make the best decisions.
Click here to sign up for a FREE Bronze Subscription, and a licensed advisor will reach out to set up a strategy session.