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Explainer: the charitable tax deduction

Every year, I have to fork a percentage of my taxable income over to the Internal Revenue Service. Taxes! But before I do that, I might consider taking advantage of the charitable tax deduction.

I might give away a car, or a boat, or some of my clothes, or jewelry. I might give away some stocks or bonds … or I could just keep it simple and hand over some cash. 

And if I give $1,000 to charity, that reduces my taxable income by … $1,000. Because there’s less for the government to tax, I pay less in taxes.

Plus, our tax system puts us into tax brackets. The more taxable income we make each year, the higher the bracket and the higher the percentage of that income that goes to the IRS. Say you’re quite wealthy, and you’re in the top tax bracket, you give away a bunch of money, which reduces your taxable income.

Give away enough, and you could shrink your taxable income enough to put you in a lower bracket. Which means all the rest of your money will be taxed at a lower rate.

It’s one of the reasons why Americans are such big donors to charity, and why come tax time, wealthy people write some very big checks.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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Paddy writes, "Give away enough, and you could shrink your taxable income enough to put you in a lower bracket. Which means all the rest of your money will be taxed at a lower rate."

But isn't it true that the "rest of your money" would always taxed at the lower rate, whether you give to charity or not? I was under the impression that under our "marginal rate" structure, the "tax bracket" we're in only tells us the rate that our last dollars of income are taxed. As an extreme example, isn't a single person with three million dollars of income only taxed at at rate of 10% for the first $8925 of that three million, just like someone who only made $8925 in total? And the top rate of 39.6% only applies against the wealthy person's income in excess of $225000, right?

Now if tax rates weren't applied marginally, but against the entire sum of income, then one could conceivably "come out ahead" by donating to drop to a lower bracket. But I don't believe it works that way. (I'm not a financial professional, but the IRS tax tables aren't higher order math!)

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