Planning for 2008 Taxes- Cash Donations to Not For Profits & Other Deductions?

Question

I got nailed on my '07 taxes, was expecting a big return and ended up owing...

Part 1: In the past I have supported a number of not-for-profits. I'm looking for guidance or resources which will allow me to calculate the maximum cash amount I should donate to charity while still realizing maximum tax savings. Is there a handy calculator somewhere on the web for this? Somehow I assume its more complex than that...

Part 2: I'm already putting 8% in a 401k and contributing to an FSA. I bought a house a few years ago but I really can't afford to live a comfortable lifestyle and support all of the bills too, and good luck selling a house at a decent price in this market! The good thing is that I do deduct mortgage interest and make a tiny piece of profit.

Any other suggestions to LEGALLY reduce my tax burden?

Sheesh.. I'm not even rich for god's sake.

Answer 1

Go see a CPA for a tax planning consultation -- might cost you a couple hundred bucks but you will probably save that in taxes if you follow his/her advice.

Answer 2

Contributions to non-profits are only deductible if they are 501(c)3 charitable organizations.

A donation to a charity gives you a deduction, but the tax savings is at most the amount of the contribution times your tax bracket. If you are in a 15% bracket and donate $1000 to an eligible organization, your tax savings is at most $150, so at least $850 of the donation comes out of your pocket.  If you don't itemize, there is no tax savings.

Answer 3

1.  NEVER spend money for the tax savings.  You will ALWAYS lose as long as tax rates are less than 100%.  At best, your tax savings will be equal to the amount of your charitable donations multiplied by your marginal tax rate.  If you're in a 15% bracket and donate $1,000 you only save $150 in taxes.  You still have $850 less in your pocket than you would have had had you not made the donation.  Therefore it ONLY makes sense to donate for the good that it does, never for any tax savings.

2. Keep up with the 401(k) deductions, at least at the level needed to get the maximum employer match if your employer offers one.  That's FREE money to you once it's fully vested.  

Only you can decide if the tax benefits of home ownership are worth it.  The deductibility of mortgage interest and property taxes are modest at best, and a LOT less than most folks figure.  You get no benefit at all from the portion of your itemized deductions that are less than your Standard Deduction.  Since the Standard Deduction rises every year and interest generally shrinks, the value of the deduction will shrink over time.  If your total itemized deductions are $1,000 greater than your Standard Deduction amount, your TRUE tax savings is only $150 in a 15% tax bracket or $250 in a 25% bracket.  

The payoff on buying a home comes when you sell, IF you sell at a profit.  You get to exclude the gain of up to $250k if single or $500k if married filing jointly from tax.  Many folks are learning that that is a hollow benefit with property values tanking in most of the country.

If you can bail at zero loss and rent a similar property for less than your total current costs, less the TRUE tax benefit, then renting makes more short to mid term right now.

Don't become a slave to tax savings alone!  Consider your total WEALTH after taxes and all expenses.  Renting modest digs and investing the difference in the stock market for the long haul will generally generate MUCH more total after tax WEALTH than being a slave to a house and mortgage and maintenance and repair costs.  

Historically the stock market has paid off FAR better than any gain from a personal residence ever has.  Historically the gain on a home barely covers inflation in the long term, short term market fluctuations excluded.  Folks who bought at inflated prices just before the market collapsed are learning that lesson the hard way right now.  In some parts of the country it may take them 10 to 20 years to recover their investment and start turning a profit.  But the guy who chose to rent and invest the difference in a carefully chosen stock portfolio could be a millionaire in 20 years.

Consider the tax impact of any financial decisions that you do make; not doing so can be costly.  Just don't let taxes drive the bus!  That can be even MORE costly in the end!