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Originally Posted by rose angel  What if you were on the borderline between two tax brackets, would donating bring you back to the lower bracket?
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For simplicity sake, let's say you have a taxable income of $45K. Let's also say that income under $40K is taxed at 10% and income over $40K is taxed at 20%. (Again, these are not accurate numbers, just simple ones for illustration.)
So, you look at it and say, "Gosh, there's really no point in making $45K if it means I'm going to be in the 20% tax bracket instead of the 10% tax bracket." You proceed to donate $5K to your church, thus bringing your taxable income back to $40K and your tax bracket back to 10%.
The problem with this scenerio is that ONLY the income over $40K would be taxed at 20%. So, if you made no donation to your church, you'd pay $1000 on the income above $40K (20% of $5K). That would leave you $4K to spend as you wanted to.
The 10% tax on the first $40K is going to be $4K no matter what. It's not suddenly going to double to $8K on the first $40K simply because you've got *some* income in the 20% tax bracket.
It's really only a matter of what you do with the remaining $5K of taxable income. Yes, you can donate it or use it for any other tax deductible purpose, therefore eliminating the 20% tax on that money. But you could also just pay the $1K in taxes and have $4K to spend on something that is NOT tax deductible.
I like how someone else put it earlier.....It's more like you're getting a discount on whatever it is you're paying for if it's tax deductible. The farming example is a good one. If I am a farmer and buy a piece of equipment that is tax deductible, I can pay $10K for it, knowing that I'm saving myself $2500 in taxes (assuming a 25% tax bracket for that money). If I *don't* buy the tractor, it's not like I'm going to have $10K in my pocket. I'm going to have to pay the $2500 in taxes first, leaving me $7500.
However, it should be obvious that it doesn't make sense to buy the new tractor JUST for the tax deduction because if I didn't buy it and paid the taxes on the $10K, I'd have $7500 left in my pocket vs. nothing left in my pocket and a tractor I don't need.
Another example would be going on a trip that offers continuing education credits while you are at a tourist type location. DH's job has tons of these...you can go on a cruise and earn CEU's while you're there. You can go to a ski resort, an island somewhere in the Bahamas, etc. Because the trip involves earning CEU's, which is required for DH's licensure, we could go on one of these trips and write off the costs of going (with some exceptions).
We could go on a $5K trip, pay for it with pre-tax dollars, and save ourselves over $1500 in taxes. We're obviously still out nearly $3500 vs. if we'd just paid the tax on that $5K, but we could take a nice trip for a "reduced" amount. Make sense?
