What "tax deductible" means for charity donations
I'm not sure whether this is something everybody knows and the topic seems timely. The numerical examples are specific to the Australian tax system, but the general principle is pretty common.
Because charitable donations are tax deductible, they cost you less in terms of after-tax dollars than normal expenditure.
The 2010-11 Australian personal tax rates look like this:
Taxable income
Tax on this income
0 - $6,000
Nil
$6,001 - $37,000
15c for each $1 over $6,000
$37,001 - $80,000
$4,650 plus 30c for each $1 over $37,000
$80,001 - $180,000
$17,550 plus 37c for each $1 over $80,000
$180,001 and over
$54,550 plus 45c for each $1 over $180,000
(Note that those tax rates don't include either the Medicare levy of 1.5% or the flood levy.)
A person on the average full-time income of about $60,000 pays an average rate of tax of 19.2%:
$0 on the first $6,000
$4,650 on their income up to $37,000
30% tax on their income between $37,001 and $60,000 = $6,900
Total tax $11,500
$11,500 / $60,000 = 19.2%.
Their marginal rate - the tax they pay on the top part of their income - is 30%. That's the part that is reduced by any tax-deductible donations they make during the year.
If a person earning $60,000 gives $100 to charity, their taxable income is reduced by $100, which effectively means they get a tax credit of $30 ($100 x 30%) for making the donation. In terms of after-tax dollars, the $100 donation costs them $70. If that person works as a pay-as-you-go employee and has tax taken out by their employer every pay period, they will get a refund when they file their return.
A person making $85,000 would get a tax credit of $37 for the same donation, making the after-tax cost $63. Of course, they were paying more tax in the first place.
I received the most effective mail-out I've ever seen from CARE Australia yesterday. I opened the envelope thinking, I'm definitely not donating for whatever this is this time, since I've recently donated for Christchurch and Queensland and Carnarvon and Brazil on top of my regular things and now Japan's just had an earthquake too. It was a safe drinking water and sanitation campaign aimed at preventing child deaths from diarrhoea, which affects far more people than the above natural disasters. It came with a training card with pictures showing how to dispose of human waste: a person squatting with a little pile of poo behind them, then scraping it into a hole in the ground with a stick; a mother holding an excreting child between her feet as she sits on the ground, then washing her hands; people clearing animal dung from their compound and keeping cattle out of their huts. It was a really effective reminder about how basic the problems facing much of the world's population are. I'll be sending them a donation after all and also a note about the impact the training card had on me!
Because charitable donations are tax deductible, they cost you less in terms of after-tax dollars than normal expenditure.
The 2010-11 Australian personal tax rates look like this:
Taxable income
Tax on this income
0 - $6,000
Nil
$6,001 - $37,000
15c for each $1 over $6,000
$37,001 - $80,000
$4,650 plus 30c for each $1 over $37,000
$80,001 - $180,000
$17,550 plus 37c for each $1 over $80,000
$180,001 and over
$54,550 plus 45c for each $1 over $180,000
(Note that those tax rates don't include either the Medicare levy of 1.5% or the flood levy.)
A person on the average full-time income of about $60,000 pays an average rate of tax of 19.2%:
$0 on the first $6,000
$4,650 on their income up to $37,000
30% tax on their income between $37,001 and $60,000 = $6,900
Total tax $11,500
$11,500 / $60,000 = 19.2%.
Their marginal rate - the tax they pay on the top part of their income - is 30%. That's the part that is reduced by any tax-deductible donations they make during the year.
If a person earning $60,000 gives $100 to charity, their taxable income is reduced by $100, which effectively means they get a tax credit of $30 ($100 x 30%) for making the donation. In terms of after-tax dollars, the $100 donation costs them $70. If that person works as a pay-as-you-go employee and has tax taken out by their employer every pay period, they will get a refund when they file their return.
A person making $85,000 would get a tax credit of $37 for the same donation, making the after-tax cost $63. Of course, they were paying more tax in the first place.
I received the most effective mail-out I've ever seen from CARE Australia yesterday. I opened the envelope thinking, I'm definitely not donating for whatever this is this time, since I've recently donated for Christchurch and Queensland and Carnarvon and Brazil on top of my regular things and now Japan's just had an earthquake too. It was a safe drinking water and sanitation campaign aimed at preventing child deaths from diarrhoea, which affects far more people than the above natural disasters. It came with a training card with pictures showing how to dispose of human waste: a person squatting with a little pile of poo behind them, then scraping it into a hole in the ground with a stick; a mother holding an excreting child between her feet as she sits on the ground, then washing her hands; people clearing animal dung from their compound and keeping cattle out of their huts. It was a really effective reminder about how basic the problems facing much of the world's population are. I'll be sending them a donation after all and also a note about the impact the training card had on me!