Re: How do "tax deductible" contributions work?

From: kafer@jps.net
Subject: Re: How do "tax deductible" contributions work?
Date: Fri, 31 Jul 1998 16:24:25 -0700

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Kristina Miranda asked:

>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?
>Thanks,
>Kristina Miranda

Kristina and all PersFiners-

There are three terms you need to know: adjustment to income, tax deduction
and tax credit. There are a lot of tax law changes effective in 1998 that
affect deductions and tax credits. (See IRS Publication 17.)

Adjustments to income are taken on the first page of the 1040, 1040A. These
are items such as IRA deductions, medical savings account deductions,
moving expenses, half of self-employment tax (social security),
self-employment insurance premiums, Keogh and self-employed SEP and SIMPLE
plans, penalty on early withdrawal of savings, alimony paid. These reduce
total income to adjusted income. The effect is to reduce the amount of
income that is taxable. The resulting reduction in the final tax paid
depends on your tax bracket; if you are in the 15% bracket, each dollar
reduction in income reduces your tax by 15 cents.

Tax deductions are a different kind of reduction in income, in that they
are subject to limits. The Congress "gives" every taxpayer a standard
deduction, varying according to your status--(1998 amounts) single
($4,250), married filing jointly ($7,100), married filing separately
($3,550), or head of household (6,250). There are increases in standard
deduction for taxpayers over age 65 or blind. If the sum of your allowable
itemized deductions do not exceed your standard deduction, you use the
standard deduction and not get any deduction for any contributions you have
made.

Itemized deductions are further limited by income. For example, only
medical expenses that exceed 7.5% of your adjusted gross income are
eligible for deduction (providing all itemized deductions total more than
your standard deduction.) There is also an income test that limits
deductibilty; if your income exceeds a certain amount, the amount of
itemized deductions that can be claimed starts phasing out.

Finally, Tax Credits. These are direct reductions in taxes, $ for $ 1:1.
There are tax credits for child and dependent care expenses, for low income
elderly or disabled, adoption, foreign taxes paid, and some others.

This is probably more than you asked for, so to address your specific
question: You cannot reduce tax $ for $ by making a contribution. Further,
contributions to be ductible must be made to IRS qualified non-profit, 
^^^^^^^^^^^^^
charitable or other tax-exempt entities. Each qualified one has a tax ID
number, which you must obtain. And large donations (more than $250) must be
acknowledged by the recipient organization with a receipt that has the tax
ID#.

Kristina -- It appears that you are not well versed in tax filing. That's
OK. But you are smart enough to use a computer. So I'll bet that you are
smart enough to learn how to do your own taxes. Get Pub 17 and read it. You
can do it!! 

However, if doing your own taxes is not high in your stack of priorities,
here are some other suggestions. If you are young and your income is low
enough, I suggest you go to a VITA site to have your taxes done. If you are
middle-to-low-income, are over age 60 and have a simple tax return, I
suggest you go to an AARP Tax-Aide, Tax Counseling for the Elderly site.
You can get the address of a nearby site from the IRS tax information
hotline (1-800-829-1040) or the AARP tax line (1-888-AARPNOW)
(1-888-227-7669) or the AARP web site:
http://www.aarp.org/taxaide/home/html .

Now for the commercial announcement for all PersFiners: How about all of
you computer and financially literate people volunteering some of your time
to prepare tax returns for low-to-moderate-income taxpayers who need
help??? The commitment is pretty minimal--about forty hours of classroom
instruction in January 1999, pass an IRS test (open book at home), and work
four hours a week at a Tax-Aide or VITA site for ten weeks, February 1 thru
April 15, 1999. To get information, surf on over to the AARP web site:  			
	http://www.aarp.org/taxaide/home.html . 

Frank Kafer, District Coordinator, AARP Tax-Aide Program.
Contra Costa County, Calif.
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