Charitable giving is one of the best ways to leave a legacy or support a worthy cause. Those are reasons enough to give, but as wealth managers, we also appreciate that donating to charities can reduce your tax bill.
As the days get shorter and the end of the tax year approaches, ‘tis the season for some financial planning based around charitable giving. In this two-part series, we’ll first explain how charitable contributions offset income. Next week, we’ll suggest four prudent ways to donate.
When you contribute to an IRS-recognized charitable organization, the value of your gift may be deducted against your adjusted gross income (AGI). However, the threshold for itemizing deductions was increased in the 2017 Tax Cuts and Jobs Act. For single filers, it’s now $12,200 and $24,400 if you are married and filing jointly.
So, from a tax perspective, if you plan to give, give big since you’ll get no added tax benefit for contributions below these thresholds. One way to do so is by “bunching” your contributions into a single year. Let’s look at an example.
You and your spouse file jointly, and your marginal tax rate is 24%—your AGI is between $168,401 and $321,450. You pay state and local taxes, and you make monthly payments on a mortgage for your home. Between your mortgage interest and state and local income taxes (SALT), you have $10,000 of deductions. If you use the standard deduction, you lose the taxable benefit of your mortgage interest and SALT payments.
Now let’s say you’ve decided to make a five-year pledge of $15,000 annually to your alma mater. With your charitable contribution of $15,000 this year, your total deductions rise to $25,000—just clear of the standard-deduction hurdle, and saving you about $144 in taxes.
However, if you can bunch your contributions into a single year, you can save much more. By bunching two annual donations in a single year, you double your deductible contributions from $15,000 to $30,000, and your savings jump to $3,744. Bunching three years of contributions to $45,000 gives you another big bump to $7,344 of tax savings. And in years when you don’t donate, you instead take the standard deduction, resulting in an overall tax savings.
If you want to bunch your charitable giving into a single year but don’t know where you want to the money to go initially, a donor-advised fund can be a viable solution. That’s something for next week, when we’ll discuss four effective strategies to making charitable contributions.
If you can’t wait for next week for more information on how to make your charitable giving impactful, check out our special report, Making the Most of Your Charitable Giving.
As always, your situation is unique, and bear in mind that the above is just to demonstrate one potential way to offset income with charitable giving. Feel free to speak with your portfolio team here at Adviser Investments or your outside tax professional with specific questions on how to give charitably and tax-efficiently. We’re happy to help.