As we approach the end of the year, individuals will begin to consider the various methods of reducing their tax bills. Charitable gifting is an altruistic and noble method of reducing taxes, but only if done properly and with true donative intent.
The essentials of charitable giving require: a valid gift to a legitimate, registered charity; a proper valuation of all underlying transactions; and appropriate legal opinions.
To understand how charitable donations work for taxpayers, we first need to appreciate the nuanced difference between tax deductions and tax credits.
The difference between a deduction and a credit is that a deduction reduces income, which indirectly reduces tax payable, whereas a credit directly reduces the amount of tax payable without reducing income. Ultimately, however, both deductions and credits put money in the taxpayer’s pocket, but they affect individuals differently depending upon their marginal tax rates.
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