Donating a portion of your income to a charity or foundation that’s close to your heart is a pretty beautiful and selfless thing to do.
But if you’re doing it in order to save on your tax bill, you may want to rethink that strategy. It’s not very effective.
While you can claim a tax credit for money you’ve donated, you’ll usually only receive a tax credit of $0.33 for every $1.00 you’ve donated. Essentially, it’s about a third of what you’ve donated in total. If you get technical and do the maths, you’ll soon work out it’s not a super effective way of saving on tax.
What is a donations tax credit, exactly?
A tax credit is applied to your IRD balance, reducing the amount you owe by value of the credit. For example, if you had a tax bill of $100, and a tax credit of $50, the value of your credit would be subtracted from the value of the tax you owe, leaving you with just $50 left to pay.
If you’ve already paid the tax throughout the financial year, you may end up with a refund for the amount you’re eligible to claim.
Donation tax credits
That being said, when it comes to donation tax credits, the credit applied is only going to be a maximum of a third of what you actually spent in donations. You’re essentially spending more in order to save a little.
Plus, to be eligible to claim this kind of tax credit, all donations need to be made to official, registered charities or schools (no, you cannot claim on donations made to your personal bank account, you goose).
It’s a pretty cool system overall and a great scheme to encourage individuals to donate to charities. The government is effectively backing you in supporting a cause you believe in. Do the good thing, and donate where you can.
But if you’re doing it just for the tax savings, there are better ways of saving in tax. For example, claiming business expenses means you can invest in things like software subscriptions and advertising that could increase your efficiency, help boost your bottom line, and save on your tax bill at the same time. You can actually use Hnry (hi! That’s us!) to do this – we make claiming business expenses easy as pie (if we do say so ourselves).
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