Does charitable deduction offset your ordinary income first before long term capital gains?

[yl71198]

Hi, there. While I understand that charitable deduction will reduce AGI, but since capital gains are added onto AGI, when you deduct income from AGI, does it offset ordinary income first and only if you run out of ordinary income, then will it deduct off of capital gains? And if it does offset ordinary income first, and is the next one short term capital gains and then lastly long term capital gains? Thanks for answering!

[Bsch4477]

Charitable deduction is deducted from your total income (which includes capital gains) as an adjustment if you take the standard deduction or if you itemize it’s included in your total itemized deductions which are then subtracted from your AGI. 

[VolvoGirl]

Why does it matter?  It shouldn't matter.  The Standard Deduction or Itemized Deductions are subtracted from your total income AGI.  And this year if you take the Standard Deduction you can take an extra 300 for Charity in addition to the Standard Deduction.  

You have the Desktop program.  You can switch to Forms and see how it works out.  You can even save your return with another name to test in.   Open the 1040 and follow the math.

[Onomastico]

It matters because ordinary income is usually taxed at a higher rate than long-term capital gains. I would hope my charitable deductions offset the income taxed at the highest rate first.

[DaveF1006]

It depends. There seems to be some confusion regarding income and deductions and what type of income does certain deductions apply to.

 If you look at a 1040, all income items are addressed in lines 1-11.  Line 11 is your adjusted gross income(AGI). Think of this as a mix of ordinary and capital gains income items that determine your overall AGI. Once this is determined, then you apply the standard deduction or itemize deduction amounts to reduce your taxable income for the year. If your itemized deductions exceed your standard deduction amount, then you will be able to claim your charitable contributions, which is an itemized deduction.

Deducting charitable contributions make no distinction on the type of income it is being deducted from but is dependent on the overall AGI that is reflected on line 11 of the 1040. 

[VolvoGirl]

So yes deductions will mainly apply to the ordinary income tax. But figuring the tax can be tricky.  There are at least 7 different ways.  You need to look through the worksheets.

If you have capital gains or qualified dividends the tax is not taken from the tax table but is calculated separately from schedule D.  The tax will be calculated on the Qualified Dividends and Capital Gain Tax Worksheet.  It does not get filed with your return.  In the online version you need to save your return as a pdf file and include all worksheets to see it.

For the Desktop version you can switch to Forms Mode and open the worksheet to see it.  Click Forms in the upper right (upper left for Mac) and look through the list and open the Qualified Dividends and Capital Gain Tax Worksheet.

[fanfare]

Tax on capital gains and losses is calculated separately, but even this depends on your AGI.

See the complicated worksheets.

Or, just go on with your life, there's absolutely nothing you can do about it.

TurboTax does the calculation, that's what you're paying for.

[ria13]

I have same question.  too bad the level 15's and expert answers here, didn't answer the question.

Only Onomastico understood the key element: because gains, and income are taxed differently. 

taxpayers have choices for when & how much, on donation amounts, taking gains, and income -  its planning. 

Long term losses 'first' have to be applied against long term gains, then short gains, then income.   

So, What is the order in which the various sources of income are offset by a donation?  

[Mike9241]

in most cases itemized deductions of which donations are a part offset ordinary income. because of the way the tax on long-term capital gains and qualifying dividends is computed ordinary income can push the tax on these from 0% to 20%.  and then there can be the NIIT and or AMT taxes. so first you need to be able to itemize and then you need ordinary income other than qualifying dividends because those are treated just like net long-term capital gains.  net short-term capital gains are just like ordinary income.  too much in the way of itemized deductions could push you into the alternative minimum tax AMT. too much investment income can push you into the NIIT tax.  just trying to point out that the answer to your question really depends on the numbers. your best option would be to buy the desktop software and then you can do all sorts of what-ifs admittedly these would be 2021 computations but it should be close to what 2022 would look like.    

[Hal_Al]

Q. Does charitable deduction offset your ordinary income first before long term capital gains?

A. Simple answer: Yes.

As with all tax questions, the real answer is: It depends!

That said, for most people, the EFFECTIVE answer is, yes charitable deductions  offset your ordinary income  (the income taxed at the highest rate) first, before offsetting long term capital gains (LTCG).  As others have said, LTCG are part of your AGI and the LTCG portion of your taxable income is not broken out on form 1040.  But, LTCG are broken out (unreduced by deductions) on the "Qualified dividends and capital gains worksheet" (or the Schedule D worksheet) and taxed at LTCG rates (which may be 0%).