(F 205) As you know, tax laws in some countries, such as the United States and Canada, allow for the deduction of certain expenses from the annual income to reduce the taxable income. One of these expenses is donations, and often donations through charitable organizations are fully deducted from the annual income when calculating the taxes owed to the state. I will present the question through a very simplified example: A man has an annual income of $100,000 and has not donated anything from his money. Let’s assume the tax rate is 20%. We find that the final amount earned by this person is $80,000 after paying the taxes. Now, if we say that this man’s Zakat amount, considering all assets and other factors, is $10,000, and if we assume that the law allows the deduction of this amount for tax calculation (making the tax value $10,000), we find that the final amount he receives after paying taxes to the state and his Zakat is also $80,000, as if he had not paid Zakat at all! In other words, it appears as if his wealth and money have not diminished even after paying Zakat. Is there any issue with this, and is the calculation method in the mentioned simplified example correct? Or should he pay a higher amount for Zakat, and how is Zakat calculated in this case? – International Institute of Islamic Studies

(F 205) As you know, tax laws in some countries, such as the United States and Canada, allow for the deduction of certain expenses from the annual income to reduce the taxable income. One of these expenses is donations, and often donations through charitable organizations are fully deducted from the annual income when calculating the taxes owed to the state. I will present the question through a very simplified example: A man has an annual income of $100,000 and has not donated anything from his money. Let’s assume the tax rate is 20%. We find that the final amount earned by this person is $80,000 after paying the taxes. Now, if we say that this man’s Zakat amount, considering all assets and other factors, is $10,000, and if we assume that the law allows the deduction of this amount for tax calculation (making the tax value $10,000), we find that the final amount he receives after paying taxes to the state and his Zakat is also $80,000, as if he had not paid Zakat at all! In other words, it appears as if his wealth and money have not diminished even after paying Zakat. Is there any issue with this, and is the calculation method in the mentioned simplified example correct? Or should he pay a higher amount for Zakat, and how is Zakat calculated in this case?

Firstly: Zakat and tax are two distinct obligations. Zakat is a right of Allāh and a religious obligation for the deserving recipients, while tax is a societal right by law.

What is considered a societal right by law takes precedence over other obligations by force of authority, and it is considered one of the basic expenses that should be considered when paying Zakat, similar to necessities like food, drink, medical treatment, and housing.

Secondly: Income tax is considered an accumulated debt that must be paid by the end of the tax year. In this case, it is exempt from Zakat as it is a specific, predetermined amount. The only difference between income tax and the required stable debt is that the tax has a specified value, which is usually known in advance based on the current situation. This value does not enter the scope of Zakat calculation.

For example, someone in a tax bracket of twenty percent would deduct this percentage cumulatively from the value of saved and earned money.

Thirdly: The principle regarding Zakat on wealth is that it should not be occupied with basic needs, such as food, drink, medical treatment, and housing, including debts that are due at the time of Zakat payment. For long-term financial obligations at the time of Zakat payment, such as immediate debts, do not prevent the payment of Zakat on saved or earned money.

Finally: The example given in the question is perplexed for the following reasons:

Donations are not entirely exempt from tax but are subject to a specific percentage, and we do not know the value of this percentage to define the tax base at the end of the tax year.
The tax debt is prioritized over other obligations by law.

After all, Allāh knows best.

Fatwa issued by Dr. Khālid Naṣr