The 501(c)(3) charity that I work for is facing a tough financial situation and is cutting management salaries by 10% for the next six months. Can I consider this a tax-deductible contribution to the organization? If not, can I ask the organization to pay me my salary and offer to contribute the equivalent amount so that I receive the tax deduction.
Unfortunately you can’t claim a deduction for income you do not receive. If you could, most charity employees could claim significant deductions on their personal tax returns for their
“donations” to charity. According to an employment study conducted for the Pennsylvania Association of Nonprofit Organizations in 2005, nonprofit employees in Pennsylvania earned on average about 6% less than for-profit employees. According to a U.S. Department of Labor study of 2007 earnings, nonprofit managers earned about 18% less than for-profit managers. But the rule is that you pay taxes on the amount you are entitled to receive. You can’t take a deduction for what you might have received.
You could ask the charity to give you your regular salary and then donate the difference back, but you would lose money if it agreed. You would have to pay federal income tax on the higher amount you received. Assuming your “donation” would be considered a deductible voluntary contribution (it might be a quid pro quo and not deductible at all), your federal income tax would be based on the same adjusted gross income after the deduction that you would have received without the maneuver. That wouldn’t cost you anything. But you have to pay Social Security and Medicare taxes on your wages, not your adjusted gross income as reduced by your deductions. Therefore, if you would earn less than $110,000 under the reduced wage, you would have to pay Social Security tax on the difference between the reduced wage and the higher wage up to the Social Security wage cap of $110,000 this year. You would have to pay the Medicare hospital insurance tax on the entire difference between the reduced wage you were scheduled to receive and the old wage you actually received because there is no cap on wages subject to Medicare taxes. If you pay a state income tax, it may not recognize any charitable contribution deduction, as in Pennsylvania. And you might have to pay local taxes based on wages or gross receipts with no deduction for contributions. There is no way you can win, so it isn’t wise to try to game the system.