Charitable Donations: Feeling Good but Hardly Worth It

Abstract

Our paper focuses on the perceived benefits of tax deduction associated with charitable donation from an individual’s viewpoint. After analyzing four average cases of taxpayers from various income levels and after dividing them as home owners or renters, we conclude that a taxpayer is more likely to receive the benefit of a charitable deduction if the taxpayer also owns a home which is secured by a mortgage. The tax benefit is defined as the dollar amount of tax that is reduced by donating to charitable foundations. We look at the tax benefit as the savings derived from the charitable contribution in excess of the standard deduction. For any amount below the standard deduction, there is no direct tax saving generated from donating.

We conclude by discussing the advice the donors, their financial advisers and tax consultants can take from this exercise. If the donor is thinking about giving to charity in the hope of saving taxes, he/she needs to take a close look at their income and standard versus itemized deductions available to them. Since lower income individuals may rely more on cheaper tax services, the tax preparation companies like H & R Block need to make their clients aware of more effective ways to save on taxes. Taxpayers who reside in major cities and generally rent need to pay even closer attention to their tax status.