How much donation would lower the income tax?
Hi, I live in Maryland with wife and two kids, on an annual income of less than 200K. How much giving (to a church or a private institute) will lower my federal / state tax? Thanks!
Answers
-
If you are filing a joint return and neither of you is blind or over 65, your standard deduction for 2023 is $27,700. The first thing you have to figure out is whether you have enough itemized deductions (unreimbursed medical expenses in excess of 7.5% of your Adjusted Gross Income, state and local taxes (capped at $10,000), mortgage interest, and charitable contributions. If all those things added together don't exceed the standard deduction, you won't get any benefit at all from any amount of contributions.
If you do have more than $27,700 in itemized deductions, then the amount by which those deductions exceed that amount will reduce your tax liability by a percentage of that amount based on your tax bracket.
I'm not familiar with Maryland's tax situation, so I'll leave that for someone else.
-
I agree with the above answer. For Maryland, the effect of the donations in your itemized deductions would be worth roughly be about 5-10% of the cost or value of your donations. The actual percent depends on the income tax rate for your city and your actual income level.
In Maryland, there are a couple of options for making donations outside of itemized deduction if you donate to specific permanent endowment funds or to certain Maryland Historically Black Colleges and Universities (HBCU). These donations will give you a tax credit.
- Endow Maryland Tax Credit: To qualify you would need to make a donation to a qualified permanent endowment fund at an eligible community foundation. Googling Endow Maryland Tax Credit will provide a list of websites for community foundations with the qualified permanent endowment funds and they should be able to provide assistance making the donations. The credit is equal to the smaller of 25% of the donation or 50,000 dollars. You can also go here and click on the Endow Maryland Tax Credit box in the list.
- Endowments of Maryland Historically Black Colleges and Universities: The credit appears to end at the end of 2023, so you would need to donate soon to take advantage. There is a limit for this credit, so you would need to apply for the credit through the Comptrollers office before making the donation via email. They are approved on a first-come, first, served basis. If approved, you can make a donation and get a credit worth 25% of your donation. Click here for access to the application, and the email address for where to send the application.
Let us know if there is anything else that we can do for you.
-
Thank you so much for the reply from both!
I invest in Maryland 529 for kids' college education, and it's said that the investment qualifies for tax credit. If it is right, is it one category of itemized deductions, which must exceed $27,700 for tax reduction, or an additional category?
Thank you!
-
Hello John! Great question.
Contributions to a 529 plan won't give you a credit or deduction on your federal return. It does look like Maryland offers a subtraction for 529 contributions, though. You can learn about this subtraction at the link below:
