Here’s Why Claiming a Charitable Giving Tax Deduction Could Really Hurt You

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Giving to charity earns you a deduction on your tax break, but a little-known rule keeps many from claiming it. Here’s what you need to know. 

Tis the season for charitable giving, and if you’re donating some of your hard-earned cash, you should be proud of yourself. Your donations can help people in need all year round. And they could benefit you when it’s time to file your taxes — but this isn’t a guarantee.

There is a charitable donation tax deduction, but there’s an important stipulation that keeps many from claiming it. Below, we’ll talk about why and how to decide if you should claim the tax deduction this year.

It all hinges on a critical decision

Before we dive in, it’s important to understand what a tax deduction is. It essentially reduces your taxable income for the year. Say you earned $50,000 in 2023 and qualified for $10,000 in deductions. Then, the IRS would only tax you on the remaining $40,000. This might even be enough to drop you into a lower tax bracket where you’ll lose a smaller percentage of your income to the government. So you definitely want to maximize your deductions.

One way to do this is to choose the right approach on your tax return. You have two options: claim the standard deduction for your tax-filing status or itemize deductions. Itemizing deductions is where you tally up the actual value of all the deductions you’ve qualified for during the year as well as tax credits, which reduce your actual tax bill. Some common examples of deductions and credits are:

Adoption creditAmerican opportunity tax credit (for higher education expenses)Charitable donation tax deductionChild and dependent care tax creditChild tax creditEarned interest tax credit (for making contributions to a retirement account)Home office deductionHSA contribution deductionLifetime learning creditMedical expenses deductionMortgage interest deductionRetirement account contribution deductionSaver’s credit (for making contributions to a retirement account)Self-employed expenses deductionState and local tax deductionStudent loan interest deduction

If you don’t want to bother with all this math or you don’t think you’ll qualify for that many deductions, you can opt for the standard deduction. This is a standard amount that everyone of a certain tax filing status may deduct from their tax bill if they choose. Here are the standard deductions for the 2023 tax year:

Most filers opt for the standard deduction not only because it’s easier, but also because many cannot come up with enough itemized deductions to exceed their standard deduction. So claiming the standard deduction results in a lower tax bill.

Unfortunately for all those giving to charity this year, it’s only possible to claim a charitable donation tax deduction if you itemize your deductions. If you opt for this in lieu of the standard deduction, you could wind up with a much higher tax bill.

How to decide whether to claim the charitable donation tax deduction

Whether to claim the charitable donation tax deduction comes down to how much you think you’ll have in itemized deductions. If you donated a ton of money — $50,000 for example — then itemizing deductions would certainly save you more money compared to claiming the standard deduction.

But itemizing deductions can still make sense even if your donation was modest. You’d need a lot of other deductions and credits, though. For example, if you paid a lot in medical expenses during the year, it’s possible that this amount exceeds your standard deduction, and then itemizing deductions would be the better choice. But if not, it’s usually best to go with the standard deduction.

This may all sound complicated, but fortunately, many tax software do the math for you. You provide information about the deductions you’re eligible for and the software will automatically calculate whether the standard deduction or itemized deductions would save you more.

You could also consult a tax professional if you’re not sure. Keep in mind that what’s best for you this year may not be what’s best for every year. Keep an eye on your income, expenses, and changes to the tax law to help you make the right call each tax season.

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