When you make charitable contributions, you receive benefits that are both financial and emotional. First of all, you know that you are likely to feel good about your charitable contribution. The feelings that accompany generosity are worth it in and of themselves.
However, our government also likes to encourage generosity, and care for the needy. As a result, it’s possible toreceive a tax credit for your charitable contributions. While most of us (hopefully) don’t donate just because there might be a financial benefit, it certainly doesn’t hurt that it’s available to you.
Even better is the fact that you might be able to invest your charitable donations credit and reap further financial benefits going forward.
What Kind of Tax Credit Comes with Your Charitable Donations?
I recently had a question that looked at the tax credit in a way I hadn’t thought of before (I love reader questions; they provide great post ideas, and they can benefit readers beyond the person who asks.) The question was this: what if, instead of donating the $200 in my example, he donated say $1,000 a year? Would he be better off getting the credit each year and investing it?
For starters, let’s break down the tax credit he would receive, each year or once at the end of 6 years. It’s important to consider this issue, since it can make a difference in your strategy, and it can help you decide what makes sense for your particular situation.
First, we figure the tax credit benefit for your $1,000 yearly charitable contribution. If you claim your charitable donation each year, you would get $262 back each year come tax time. If you saved up the receipts and filed 6 years together you would have $1,712.
Next, it’s time to see what happens to the money when you invest it, using different scenarios. If you receive your $262 credit each year and put it into an investment making 5%, you end up with $1,782 at the end of 6 years. This represents a slight increase over the $1,712 you would receive by saving up the receipts for 6 years.