Qualify as a Donation

• It is a fairly well-known fact that giving away money to certain causes can lower taxes, but how exactly such donations affect taxes is often a source of confusion. First and foremost, in order for a donation to affect taxes, the donation must be made to an organization which qualifies as a charity under the IRS tax code. In general, organizations that qualify as charitable are nonprofit institutions, those which work on projects for the public good or the government itself. Things such as giving money to a friend that is in debt trouble or a family member that is looking for start-up money for a business would not be considered qualifying donations.
  
  

Itemized Deduction

• The way charitable donations affect the amount of taxes owed is in the form of an itemized tax deduction. When you pay your taxes, you start out with with gross income, which includes all money you've earned throughout the year. First special deductions are made, known as above the line deductions, after which gross income becomes net adjusted income. From net adjusted income, a taxpayer can choose to deduct a standard deduction, which is based on their income demographic, or all of their itemized deductions, which includes charitable contributions. Itemized deductions are subtracted from net adjusted income to arrive at your taxable income -- the income pool from which taxes are ultimately taken. Therefore, the more charitable donations that are made, the smaller the pool of money that is deemed taxable income, which is how you save tax money.
  
  

Considerations

• Even though charitable contributions count as an itemized deduction from everyone, certain people stand to benefit more from donations than others. Those at a low income level are not taxed much in the first place, and may even be eligible for tax refunds, so charitable contributions shrink a tax pool that will not be taxed much. Additionally, the standard deduction for people at low income levels is higher relative to their income than those who make more money, so it is possible that itemized deductions will be less than the standard deduction for those who earn less. Another factor that ultimately guarantees that high income earners benefit more from charitable giving is that wealthy people are taxed at a higher rate than people with lower incomes. A person taxed at a 50 percent tax rate stands to save more from a deduction of a given size than another person who is only taxed at a rate of 25 percent.