Guide to Charitable Giving | Adviser Investments

Charitable Giving: Going Big and Paying Less

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.

When you contribute to an IRS-recognized charitable organization, the sum can be deducted from your adjusted gross income (AGI). In 2021, taxpayers of any income level who donated cash to charities were able to deduct up to $300 for single filers and $600 for couples filing jointly (something to keep in mind if you’ve filed for an extension). That write-off is due to a provision in a 2020 pandemic relief bill which Congress extended through tax-year 2021; it’s not clear whether it will be made permanent or carry over to 2022. In general, only if you’re itemizing deductions can you take full advantage of the ability to deduct charitable gifts. The threshold for itemizing deductions for the 2022 tax year is $12,950 for single filers and $25,900 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 advantage for contributions below these thresholds. One way to benefit is by “bunching” your contributions into a single year. Let’s look at an example.

Say you and your spouse file jointly, and your marginal tax rate is 24%—your AGI is between $178,751 and $340,850. 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.

You’ve decided to make a five-year pledge of $15,000 annually to your alma mater. With your charitable contribution of $15,000, your total deductions rise to $25,000, which is under the standard deduction.

However, if you can bunch higher contributions into fewer years, you can start to save on taxes. By bunching two annual donations into a single year, you double your deductible contributions from $15,000 to $30,000, and your savings jump to $3,576. Bunching three years of contributions ($45,000 in one year) brings you to $7,176 of tax savings. And in years when you don’t donate, you’d simply revert to 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 the money to go initially, a donor-advised fund can be a viable solution. We will explain that in more detail next week when we discuss four effective strategies for charitable contributions.

If you can’t wait that long to learn 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 our example is one of several ways you can offset income with charitable giving. Feel free to speak with your wealth management team here at Adviser Investments or your outside tax professional if you have specific questions on how to give charitably and tax-efficiently. As The Planner You Can Talk To, we stand ready to help.

About Adviser Investments

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