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 😆
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So the simple way to talk about taxes is “you pay taxes on the income you make”. But the definition of “income” gets complicated.
“Adjusted gross income” is a fancy term that means “the money you made”. It’s hard to explain why they don’t just say “income” other than “AGI has a legal definition so it’s important they use the word so you know what they mean”.
But before you pay your taxes, you can argue that a lot of different things should be subtracted from your “adjusted gross income”. In general the argument is, “Spending this money this way meets criteria that we both agree I should not pay taxes on that income.”
Some of those things are stuff like your medicaid deductions. The argument is since that money goes to the government anyway it’s *already* a tax so it’s not fair to also pay income tax on it.
Another “deduction” is a direct business expense. If your job *requires* you to buy a laptop, you can argue the money you used to buy that laptop was never “income” because it was a business expense and if you didn’t spend it, you’d have no income. This gets a little tricky because the tax law stipulates you have to assert that business laptop is almost never used for personal purposes, but you get the general idea.
So what I’m saying is there are hundreds and thousands of ways you can spend money that the IRS agrees is something that shouldn’t be taxed as income, and there are a lot of reasons.
In this case, if you donate money to charity, you can count that money as “not income” up to between 20% and 60% of your total income! So in theory if you donated 60% of your paycheck to a charity, you’d only pay income tax on the other 40% and *probably* save a lot of money in taxes.
The reason they listed a lot of different numbers is the IRS does not consider all charities equal, and you can donate money in a lot of different ways. Some “donations” aren’t permanent so the IRS doesn’t count them at all. Some “donations” are more like trades so they don’t count either.
So there are complicated laws that say “If you donate *this* way to *that* kind of organization, you are limited to 20% of your adjusted gross income”. That means if you donate 25%, the “last” 5% you donated is still part of your “taxable income” so you still pay taxes on that 5%. But if you make that donation in a different way to a different charity in a way that’s limited to 30%, you’d get to pay no taxes on all of the money.
It didn’t go into more detail because there are a LOT of laws about how donations are categorized, and fully explaining it is why we have tax lawyers. They are experts, and if they’re helping you plan your tax year they can help you find a way to donate to a charity that helps you the best.
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