How to Give and Still Get Money Back
Updated: Aug 5, 2020
Just a few years ago, if you wrote a check to your church or charity they would send you a paper at the end of the year, and for most people that paper would give them a deduction on their taxes and you’d get some money back for being charitably inclined.
Now because of the Tax Cut and Jobs Act in 2018, the standard deduction amounts have gone up quite a bit. If you are filing single on your taxes it is $12,400, if you are married filing jointly it is $24,800, and if you are filing head of household it is $18,650 for the 2020 tax year. That’s a great thing and it means that more people get a larger refund!
What does that mean for your charitable giving? Well in broad-stroke general terms, it means that if your property taxes, mortgage interest, and charitable giving do not total an amount greater than this deduction, you will essentially no longer be getting a deduction for that interest payment, tax, or gift. So how do you take advantage of both your higher standard deduction and potentially get more money back from your charitable giving? The answer could be tax bunching.
How tax bunching works is it focuses more on the timing of the tax planning. Here’s an example:
Couple A: Pays $7,000 per year in property taxes, pays $6,000 per year in mortgage interest on their home, and gives $9,000 to their church every year. Their total between the three is $22,000 so they take a standard deduction and apply the $24,800 to their taxes because they get more back and pay fewer taxes; however, they essentially received no deduction for any of their giving.
Couple B: Has the exact same financial situation as Couple A, but they go about giving and paying differently. Couple B pays their property taxes in every other calendar year (so they pay 2020’s property taxes in January of 2020, and 2021’s property taxes in December of 2020). This allows them to apply the maximum of $10,000 in property taxes to their 2020 tax deductions. They also pay their $6,000 in mortgage interest through each year, but they have chosen to use a Donor Advised Fund for their giving to church. This gives them an $18,000 charitable gift ever other year. By adding together the $10,000 in property taxes paid, the $6,000 in mortgage interest, and $18,000 in giving, the total deduction is now $34,000 every other year and $24,800 on the years they don’t do this. That means that they get an extra $10,000 in deductions every other year.
How does the donor advised fund work that would allow them to do that? In short, they have to be able to prime the pump and prefund their giving. If they were going to give $9,000 throughout 2019 from their paycheck, they can do that; however, before the end of the year they are going to take an additional $9,000 one time and put it into a donor advised fund. This is a fund that allows you to issue grants to your church so they get the check just like you wrote it; however, you get the tax deduction in the year you want.
Once a donor advised fund is prefunded, it is just a matter of giving from your check one year and giving from the fund the following year. By looking at your charitable giving in this bunching method and utilizing a donor advised fund so you can control when you get the tax benefit, you are able to get above the standard deduction and put dollars back in your pocket. It can be somewhat complicated to understand so definitely reach out for further explanation.
The information contained in this communication does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Andrew Cremé and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. This case study is for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. Raymond James does not provide tax, legal, or mortgage services. Please discuss these matters with the appropriate professional. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.