Q on Tax Write-Offs from an Income Tax Newb

[Mademoiselle NOBS]

Please help!

I'm so confused on how the whole concept of tax deductibles works. I'm hearing two seperate stories of how it works, and really need to know what the facts are.

Okay.

Say you're an individual making a salary of $50,000 /yr.

You donate to a charity that entitles you to a $500 tax write-off.

You paid $5,000 Federal Income Tax that year that you donated.

This is what I would like to know:

Is it:

A) You're entitled to $500 back of the $5,000 in paid Federal Income Tax;

or

B) The $500 is deducted from your salary which you are taxed on (in this case, $50,000 /yr minus $500 is $49,500) which would mean that you would likely see a return back of something as ridiculously small as $5.00 from the $5,000 you paid in Income Tax, instead of $500.


I'm praying for A, which is what I've understood until just recently (enter the B scenario). Thanks in advance!

[Leon]

Sorry, the answer is B. If it were the first one, I would have paid zero taxes for the last 5 years.

[Mademoiselle NOBS]

Confused again! :)

Unless I am reading it wrong, Leon's reply conflicts with DarkFury's.

In the event DarkFury is correct, one could assume the following (I'd assume):

If you are in the 50% tax bracket (easy round number), and you have $1000 in tax deductibles, you would get $500 back? Or am I misunderstanding that?

And how can you find out which tax bracket you are in? Thanks for the replies, by the way.

[johnnymk]

Roughly, if your before tax income is between $30K and $60K, you will be in the 28% tax bracket. So if you give $1000 in cash or equivalent, you will get back $280. If you give $3000, you will get back $840. However, once you give above 10% 0f your gross income, you COULD become subject to an audit.

[InfiniteNothing]

Originally posted by Mademoiselle NOBS
Confused again! :)

Unless I am reading it wrong, Leon's reply conflicts with DarkFury's.

In the event DarkFury is correct, one could assume the following (I'd assume):

If you are in the 50% tax bracket (easy round number), and you have $1000 in tax deductibles, you would get $500 back? Or am I misunderstanding that?

Both lead you to same conclusion. Assume Leon is right. You make $50,000 you are taxed 50% that's $25,000 lets say you have $1000 in deductions your adjusted tax income is $49,000 and you pay $24,500 in taxes thus saving you $500

Situation A is called a tax credit.
Situation B is called a tax deduction.

Now for my question. Can donations put you into a lower tax bracket. I think they can but I'm not sure. Could you theoreticly make money by donating money?

[InfiniteNothing]

nicely done. Great memory refresher.

[dbax791]

Yeah, but its all moot if you don't have enuf other deductions to itemize and clear the standard deduction.

[Mademoiselle NOBS]

Thanks for all the information. Definitely a lot clearer now :)

[Jeffbx]

I've found that my good friend TurboTax will take care of all of my questions & problems....

[faither]

Don't rely on TurboTax. I had a recurring problem (multiple years) having to do with taxes paid to two different states. The software didn't take into account he effect on one state when certain actions are taken on another. I was fighting TT until my state waived penalties and interest. What a pain in the a$$. This tax year, some accountant gets to make a couple of hundred for doing my taxes.

[Jeffbx]

No no - I sure wouldn't count on it for a tricky situation. When I moved several years ago, I just went to an accountant & had them deal with it - two states, three different employers between me & my wife, new mortgage - it was worth a couple hundred bucks for someone else to worry about that hassle.

But every other year for the past 6 or 7 years, TurboTax hasn't failed me yet!