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Does Donating to Charity Save You Money On Taxes? - YouTube
Channel: Influential Finance
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have you ever heard anyone say that you
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should donate money to charity towards
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the end of the year so you can save
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money on taxes well this is a huge
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misconception that i keep hearing again
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and again although you might pay less in
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taxes by donating the amount that you
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save is not greater than the amount that
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you donate and in this video i'm going
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to go over exactly how this works so
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that you understand and are not
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repeating the same myth to other people
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let's go
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hey this is carlos with influential
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finance and on this channel i make
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weekly videos to help you improve your
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personal finances so if you're new here
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consider subscribing now before i start
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i just want to get one thing out of the
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way by me explaining to you that you
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don't save money in taxes by donating
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does not mean that i am telling you to
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stop donating money i'm only educating
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you so that you understand how taxes
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work and are not donating for the wrong
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reasons i donate every month to causes
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that i care about and i believe that
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everyone who can should as well so with
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that said let's jump into it so reason
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number one why donating money doesn't
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actually save you money in taxes is that
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you can only deduct charitable
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contributions if you itemize your
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deductions on your taxes so right off
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the bat if you don't know what itemizing
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your deductions is you probably don't
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itemize your deductions only about 10 of
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americans actually itemize their
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deductions on their taxes so only about
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10 of people actually might be able to
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take advantage of this deduction so to
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give you a brief explanation on your
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taxes you have your standard deduction
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and you have your itemized deductions
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you can take one of these two deductions
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on your taxes most people take the
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standard deduction the standard
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deduction for 2021 is about 12 550
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for a single individual under the age of
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65. however the government allows you to
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itemize your deductions if your itemized
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deductions are above the standard
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deduction if your itemized deductions
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don't add up to more than the standard
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deduction then you can only take the
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standard deduction so like i said before
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about 90 of americans take the standard
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deduction so by you donating money
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there's a high probability that you
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won't even be able to take the
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charitable donation deduction so when
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considering the standard deduction
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versus itemizing your deductions some of
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the things that you can itemize are the
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interest portion of your mortgage
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payments
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any large medical expenses
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and any donations that you made to
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charity if you total all of these
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expenses and it's larger than the
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standard deduction then you can itemize
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your deductions instead of taking the
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standard deduction however as i've said
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before for most people you will not be
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itemizing your deductions because most
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people don't have 12 over 12 000 of
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uninsured medical expenses of donations
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to charity and things like that one
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exception to this that i actually spoke
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about in a different video is that in
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the cares act that was passed last year
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in 2020 uh for coronavirus relief there
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was an exception made that actually
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people who take the standard deduction
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could take an additional 300
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on their taxes this is the only
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exception that i've seen to be able to
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deduct charitable donations without
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actually itemizing your deductions the
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second reason why you don't actually
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save money on taxes by donating to
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charity is that the amount of the
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benefit or the amount that you save in
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taxes is not greater than the amount
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that you actually donate so i'm going to
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put some numbers on this frame just so
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that you can follow along so for this
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example let's say that you're making 100
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000
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out of your 100 000 you choose to donate
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five thousand dollars to a random
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charity of your choice so this five
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thousand dollar donation that you made
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what it does is that it reduces your
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taxable income it pretty much reduces
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the number or your income that your
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taxes are calculated from aka your
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taxable income so instead of paying
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taxes on 100 000
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you would instead pay taxes on 95 000
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so assuming a 20 tax rate if you were to
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donate five thousand dollars from your
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one hundred thousand dollar salary your
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tax savings would be one thousand
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dollars i calculated that by taking the
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five thousand dollars that you donated
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times your tax rate that would give you
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your tax savings so in this scenario you
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donated five thousand dollars to only
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save one thousand dollars in taxes and
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if you were to flip this around and you
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were to keep your five thousand dollars
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and pay the taxes on that five thousand
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dollars you would end up with four
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thousand dollars you would end up
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keeping four thousand dollars and paying
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one thousand dollars in taxes hey if
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you're enjoying this video i actually
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make videos just like this one every
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single week so if this is something that
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you want to see more of make sure you
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click the subscribe button and turn on
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notifications so that you get notified
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every time i post a video alright let's
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get back to the video
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so as you can see you would literally
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end up with more money by just keeping
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your money and not donating it and like
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i said before like i said at the
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beginning of this video i'm not telling
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you to not donate your money this is not
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the purpose of this video i'm just
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trying to get people to stop saying that
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you should donate money to save money on
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taxes i even hear charities at the end
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of the year trying to get people to
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donate by telling them that there's that
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they'll save money on taxes and that's
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just not the case like i said you might
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pay less taxes but overall you do not
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come out on top here so from those first
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two reasons that we've already discussed
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the main two takeaways are that one
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there is a very low likelihood that you
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are itemizing your deductions so the
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charitable contribution deduction
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probably doesn't even affect you and two
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the amount that you benefit or the
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amount that you did that your taxes are
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reduced by is not greater than the
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amount that you donate so you would end
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up with more money in your pocket if you
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were to keep the money and not donate at
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all one last thing that i wanted to go
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over to finally put this to rest once
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and for all is that a lot of people
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think that if you're on the edge of a
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tax bracket you can donate money to drop
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yourself into a lower tax bracket and
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therefore pay a lower percentage of
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taxes in your total income and this is
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also not true if anybody ever tells you
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this they clearly have no idea how our
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tax system works here in the us we have
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what's called a progressive tax system
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so what a progressive tax system means
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it's just that we apply higher taxes to
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higher levels of income so i'm gonna go
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ahead and put a picture on the screen of
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all of the tax brackets so that we can
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talk about it so on the screen right now
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you're looking at the tax brackets for
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2021. for the sake of this example let's
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just focus on the unmarried or single
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individuals a lot of people think that
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you know if you look at the 24 tax
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bracket a lot of people assume that if
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you're between that income range then
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you pay a 24 tax rate and that is not
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the case so to give you a very brief
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example of how our tax brackets work
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let's assume that again that we're
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making a one hundred thousand dollars
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even though we're making one hundred
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thousand dollars the ten percent tax
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bracket and the twelve percent tax
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bracket all affect us still even though
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we're making significantly above the
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income thresholds that you see here so
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what this tax bracket is telling us is
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that for whatever money we make between
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zero to nine thousand nine hundred and
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fifty dollars we would pay a ten percent
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tax rate and then we would move on to
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the next tax bracket which is any money
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made between nine thousand nine hundred
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and fifty one to forty thousand five
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hundred and twenty five dollars for any
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money that we made between those two
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amounts we will pay a twelve percent tax
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rate and then since for this example
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we're assuming that we're making a
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hundred thousand dollars a year we would
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continue to move down until we hit our
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our total taxable income but the thing
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that i want you to get out of this is
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that when you cross into a higher tax
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bracket you don't pay the new tax rate
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on all of your income the percentage for
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that new bracket would only affect the
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income that is over that bracket's limit
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not on the rest of your income so i hope
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this video finally puts this myth to
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rest because i'm tired of hearing people
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telling me over and over again that you
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should save you should donate money to
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save money on taxes and like i said
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before everyone that can should donate
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but that's not the reason why you should
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because it's just not true so as the end
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of the year is approaching you might
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hear people tell you to donate money to
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save money on your taxes and if anybody
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ever tells you that you should do that
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you can now send them this video that
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pretty much wraps it up for this video
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but i've actually let youtube decide
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which video you should watch next and if
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you want to see the video that youtube
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selected just for you make sure you
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click the video right up here and i'll
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see you there peace
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