I've often read and heard the quote, "Tzedakah (charity) is equal to all the other commandments combined," said to be from the Talmud. But I'm skeptical. Can you tell me the real story?
Firstly let me assure you that what you heard is indeed correct. The source for this statement you quoted correctly is the Talmud (Baba Batra 9a).
Let me share with you some more of what our sages say about tzedakah:
"Tzedakah and acts of kindness are the equivalent of all the mitzvot of the Torah" – Jerusalem Talmud, Pe'ah 1:1.
"Greater is tzedakah than all the sacrifices" – Talmud, Sukkah 49b.
"If only the people who lived in the generation of the Flood and the people of Sodom had given tzedakah, they would not have perished" – Midrash Zutta, Song of Songs 1.
"Great is tzedakah, for since the day that the world was created until this day the world stands upon tzedakah" – Midrash Tanna d'Vei Eliyahu Zutta 1.
Now sit back for the "real story." There are quite a number of explanations dealing with the greatness of tzedakah over all other commandments and its all encompassing nature. Here is one which discusses the matter in a very practical light.
Very few mitzvot a person does require the investiture of one's entire being. You eat kosher with your mouth, learn Torah with your head, light Shabbat candles with your hands, etc. Even those commandments which engulf the entire body, such as sitting in a sukkah, do not involve a person's total talents and efforts as well.
Humans possess an inherent drive to live, and to live well. This urge manifests itself in working to achieve the desired level of comfort. The majority of people spend most of their day toiling to earn money, in order to maintain or better their standard of living. When a person sets aside a portion of that money, and gives it away to charity, he is not sanctifying merely his food, or some other possession, or his mental capabilities; he is giving up something in which he invested his whole self for G‑d's sake. That's an unbelievable feat, and that's what you accomplish every time you give tzedakah.