There are many ways that both the wealthy, as well as all other taxpayers, can reduce their tax bill come tax refund time. One way to cut a little off your tax bill and save some money is by making charitable donations. Charitable donations are a great way to reduce your tax bill and they also make you feel good. There’s nothing wrong with experiencing a little emotional pick-me-up at the same time you’re saving on your taxes.
Sweat the Small Stuff
There are some things to remember when making charitable donations that can make a big difference. In other words, there’s a right way and a wrong way to do things. Obviously the more you donate, the greater your tax dividend, but in this case, you do need to sweat the details. First, you need to put your donations on Schedule A of form 1040. That means you, of course, that you need to itemize. Also, your deduction can only go as high as 50 percent of your adjusted gross income with most charitable contributions. Some are only as high as 30 percent.
Keep the Calculator Handy
There is more. You cannot count the entire amount of all charitable donations. In other words, you can’t deduct anymore than the fair market value of anything you receive in return. For example, if you donate $1000 for a raffle ticket to win a car and you get a $100 gift voucher for another prize as part of your donation, then you can only deduct $900 of your donation. It’s also important to be sure that the charity is legit and you can be sure that the IRS has a list and they’re checking it twice. You can check the list as well by clicking here.
Buffet Knows Donations
As with many tax-related issues we can look at some of the country’s super rich for an example of how to do things right. According to reports, Warren Buffet donated $2.6 billion to charity last year and in 2014, he has already matched that total and then some, with $2.8 billion in donations to charity. However, Mr. Buffet didn’t throw briefcases full of cash to these charities; instead he donated stock shares from his company. So why donate stock and not cash?
Stocks Yield Greater Returns
The reason has to do with the tax deduction, of course. When you donate stock your charitable contribution deduction is based on the fair market value of what you give. Why is that? Value and basis are not the same and that means a larger tax advantage for those who donate stock. How so? By giving his shares at their market value, Mr. Buffet receives credit for any appreciation his shares experience, without having to pay income tax on the amount he gains. That alternative is much better than selling his stock, then paying taxes for his increase and then donating the cash.
Follow Mr. Buffet’s Lead
As you can see, when you make charitable donations this way you can get a much larger tax deduction advantage for your donations. So if you want to save like the wealthiest people, you should donate like the wealthiest people.