Can You Give Enough to Charity to Owe No Taxes?

Dear OIP — 

Things are not so simple, I’m sorry to say. Let’s start by looking at your baseline. You earn $37,500 over the course of the year, and I’ll assume that’s your only income — no taxable interest, no capital gains, no big refund of last year’s state tax, etc. I’m also assuming you’re filing as a single, unmarried taxpayer.

Without using any special deductions, $37,500 becomes your adjusted gross income too. The standard deduction and personal exemption lower that to $29,550 in taxable income, on which you’d owe $4,075 in federal income tax.

Now let’s see if we can get rid of that tax bill by making donations to charity.

Charitable donations are taken as itemized deductions, so you’ll need to fill out Schedule A. The drawback with itemized deductions is that in order to take them, you have to drop your standard deduction ($4,850). This means you have to donate $4,850 to charity just to break even.

On the other hand, by itemizing you are also able to deduct medical expenses, state & local sales or income taxes, casualty and theft losses, etc. For this example, for simplicity’s sake, I’ll pretend you don’t have any of that, but if you do, each dollar of that is a dollar you won’t need to give away to hit the mark.

So how big do your itemized deductions have to be in order for you to hit zero on the tax line? You might want to sit down before you read this — $34,400. Which leaves you $3,100 to live on for the year.

There’s got to be a better way, right?

My first instinct is to tell you to use the tool that I rely on: the retirement savings tax credit. It’s a two-fer: you get a deduction for up to $3,000 that you put into an IRA or 401k, and then (if your Adjusted Gross Income is low enough) you get a credit that takes away at least some of the tax on what remains.

That parenthetical caveat, though, is gonna cost you. See: the itemized deduction doesn’t apply until after your Adjusted Gross Income is calculated. So no matter how much you give away, you can’t get your Adjusted Gross Income down low enough to qualify for the credit (the credit vanishes when your Adjusted Gross Income gets above $25,000).

So you can go ahead and take $3,000 of the $34,400 that you were going to give to charity and give it to your IRA instead. You’ll still be below the tax line, but you’ll still have to give the rest to charity. But look on the bright side — you’ll have saved for a whole year of retirement, assuming you’ve figured out how to live on $3,000 a year by then.

To make a long story short: if there’s a way to do what you’re asking, it involves getting advice from a craftier tax advisor than The Picket Line.

It’s much easier if you don’t earn the money in the first place. If you’d only made $27,500, you could put $3,000 in an IRA, give away $19,400, and end up with $5,100 to live on (not much of an improvement). If you only made $17,500 though, you could put $2,500 in an IRA, drop a nickle in the Salvation Army kettle, and tell the IRS to take a hike as you spend the remaining $15,000 yourself.

As a side note: since you’ve said you’re earning your salary as a teacher, I should remind you to save your receipts if you buy things for your classroom out of your own pocket. You can deduct some of this before calculating your Adjusted Gross Income (last I checked the maximum deduction was $250, but this may have changed in the recently-passed tax legislation).

Addendum: On I added a recommendation that OIP consider starting a home business and deducting expenses from that until he can get his income down.