Need wallet.org says “In general, you can deduct up to 60% of your adjusted gross income via charitable donations, but you may be limited to 20%, 30% or 50% depending on the type of contribution and the organization.” but I don’t know what those words mean 😆
In: 9
#ELI5
Let’s start with basics. You earn income. You pay a percentage of your income as taxes. You already understand that.
But the government really wants to encourage certain kinds of behavior, and discourage others. Yes, they want to “guide” you to doing some things, and try to convince you not to do other things.
One way the government “encourages” you to do things, is with incentives. You promise your toddler a cookie if he puts away his toys. You promise your teenager a PS5 if he gets all A’s.
The government will actually allow you to pay LESS in taxes if you do some of the things they like people to do.
One of those things, is get married. For whatever reason, the government wants to encourage marriage, so they give tax breaks for married couples.
Similarly, the government WANTS people to contribute willingly to charity. It’s a “virtue”, they feel, and they want to encourage that.
So if you contribute to charity, the government will reward you by allowing you to pay less in taxes.
HOW do they figure out how much less taxes you should pay?
One way would be to just reduce the overall dollar amount. Simple. But that’s not how it’s done.
Remember from the beginning, we said that you are taxed a percentage of your income? So let’s say the percentage is 10%.
If you earn $10,000, you pay 10% of that, or $1,000.
If you earn $20,000, you pay 10% of that, or $2,000.
If you earn $30,000, you pay 10% of that, or $3,000.
BUT! If you make a charitable contribution, **the government will “pretend” that you earned less!**
So if you earned $10,000, but gave $1,000 to charity, the government will say, “Eh, bananascare, let’s just say you really earned $9,000, okay?”
And if the percentage is still the same ….
You earned $9,000, you pay 10% of that, or $900. WIN FOR YOU!
So let’s go back to the language in your question. “You can deduct up to 60% of your adjusted gross income via charitable donations”.
You can deduct (remove) some of your income, by giving to charity. You’re reducing the amount of income you pay taxes on.
“Gross adjusted income” is just a funny word that means, “taking into account all the other things, *this* is what you *really* earned.”
It’s like saying, “So after we pretend you earned less because you gave to charity, this is the final amount we say you earned.” That’s your “adusted gross income”.
And all those percentages (“up to 60%, but may be limited to 20%, 30% or 50% depending on…”)?
Really that means that, no matter HOW much you give to charity, you can’t reduce your income by more than 20%. Or 30%. It all depends on lots of other things.
Let’s examine “up to 60%”:
If you earned $10,000, but you gave $1,000 to charity, we say you really earned $9,000, and you pay 10% taxes on that.
But if you earned $10,000, and you gave *$9,000* to charity … no, the government won’t say that you really earned only $1,000. *”We want to give you an incentive, but let’s not get carried away, okay?”*
So you can only deduct 60% of your income by donating. You can’t deduct more than that. There’s a limit to how much help you get by donating to charity.
Make sense?
It gets trickier. Say the government really really really wants to encourage you to donate to cancer research. So if you gave $1,000 to cancer research, it lowers your “taxable income” by $1,000 (as in the example above). And so you’re only taxed 10% of $9,000.
But some charities … the government is less thrilled about. Like, say the government agrees that pokemon research is a charity, but not of the same importance as cancer research.
So if you gave $1,000 to pokemon research, the government will only reduce your taxable income by $500 … because the government considers that less important, so you don’t get as big an incentive.
That is what this language means: “may be limited to 20%, 30% or 50% *depending on the type of contribution and the organization”*
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