Here’s a fact that may surprise you: lower income people give far more to charity than people in the upper income brackets. And yet the laws for charitable giving bend over backwards to accommodate high-income charitable givers, and often don’t allow low income people to get a deduction at all.
The reason is that only people who itemize their deductions get to claim charitable deductions, and lower income households usually don’t itemize. Here’s a quick primer:
Every person filing taxes gets a personal exemption of $4050 for every taxpayer and dependant claimed on her return. In English, this means that everybody’s first $4050 of income is automatically tax-free. If you are married with three kids, you only pay tax on any money you make over $20,250 ($4050 personal exemption x 5 people).That’s true for you, me, and Warren Buffett.
After that point, you fall into one of two categories: 1. a person taking the “standard deduction” or a 2. person who “itemizes” deductions.
The standard deduction is $6,300 for an individual, or $12,600 for a married couple. On top of your personal exemption, you also don’t pay tax on the standard deduction amount. So for a single person, you don’t pay any income tax on your first $10,350 (that’s $4050 personal exemption + $6300 standard deduction). A lot of people in the US don’t pay any income tax at all, and this is why – their income is simply below these tax free amounts.
Let’s say you’ve got more money. If you spend more than $6300 on things that are “tax deductible,” then you can opt out of the standard deduction, and instead itemize your deductions. Some itemizeable categories are unreimbursed employee expenses, theft and casualty losses, and dramatically high medical costs (there’s a high threshold on these). But by far the most common is mortgage interest and real estate taxes. Typically, if you own your home, and pay a mortgage, your deductible expenses are higher than the standard deduction, so you itemize. Most renters, except those with outsized spending (usually because they live in a high cost city), take the standard deduction. Effectively, the standard deduction is taken by a huge majority of lower- to middle-income Americans (68%), while higher-income Americans itemize (30%).
Why does itemizing matter? If you itemize, there are many more tax-deductible expenses available to you than to a person who takes the standard deduction. One of those is your charitable contributions.
So if you take the standard deduction, know that you are not going to get an additional tax deduction for your charitable contributions. But, I hope you will still remain generous.
One way that you can still get a tax deduction for money spent on charitable organizations is if you do it through your freelance business for a genuine business reason. For example, if you give money to a little league team to get T-shirts printed, and those T-shirts feature your business logo, that is actually advertising. So you may deduct it on your Schedule C, whether or not you take the standard deduction.
There are a few more restrictions in charitable giving to know about, if you are in the lucky itemizing camp. Donations to political organizations and foreign organizations (with a few exceptions) are not tax deductible. That said, there are a couple ways around these restrictions
For political organizations: sometimes, the organization that you want to donate to has a non-political foundation arm. This means that by definition, the foundation isn’t allowed to engage in restricted political activity. But donating money to it is tax-deductible. A good example is the ACLU. A donation to the ACLU is not tax-deductible, because the ACLU engages in political activity—specifically, legislative lobbying. However, if you donate to the ACLU Foundation, which engages in litigation and public education efforts, that is deductible.
For international organizations: generally, only donations to US charities are deductible, so to get around that, many large international organizations such as the Red Cross and OxFam have American branches. You must donate to the American branch in order to get a deduction.
Most organizations try to make the tax benefits of donating as clear as possible, by adding a single line on the donation page that says something to the effect of “x company is a 501c3. Your donations are x percent tax deductible to the fullest extent of the law.” If you don’t see that status noted on the donation form, you may want to confirm that your donation will be tax deductible before donating. Handily, the IRS has a lookup tool for that.
DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.