RE: How do "tax deductible" contributions work?

From: kmealy@juno.com (Keith Mealy)
Subject: RE: How do "tax deductible" contributions work?
Date: Fri, 31 Jul 1998 17:24:08 -0400

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You are confusing tax *deductible* with a tax *credit*

A tax credit is a dollar-for-dollar reduction in the taxes you owe.

A tax deduction is a reduction of the income on which you owe taxes.

Since the tax rates are not 100% (yet :), a deduction is only a 
percentage of the value of the deduction.  For example, if your
marginal tax rate is 28% (you would pay $28 more if you earned 
another $100), then a deduction of $3000 would save you 
$3000 * 0.28 = $840 in taxes.  This is because your AGI
(adjusted gross income) would be $3000 less.

An interesting twist is if you give an appreciated asset.  If you bought,
say, Microsoft stock for $500 and it's now worth $3000. If you  donate
the stock itself, you will get a $3000 deduction, without having to pay
any tax on the increased value (from $500 to $3000).  If you sold the
stock first and donated cash, you pay taxes on $2500 increase,
then take the $3000 deduction.

- ----------------------------------
 Kristina Miranda asks:

I am wondering what "tax deductible" really means. Is it a 1:1
relation to what you owe in taxes? For instance, If I am going to
owe $3000 to the IRS next April, can I make $3000 in tax-deductible
donations before January and pay nothing to the IRS?

kmealy@bigfoot.com
Cincinnati, OH

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