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Timothy Iseler

How Giving Away Money Helps You Save On Taxes

We all feel better when we use our time & money to support causes that matter to us, right? Whether you donate to a nonprofit, volunteer at a local food bank, contribute as an alum to your old university, or even buy a few boxes of cookies each year from your local Girl Scouts, using your money to help uplift others has real benefits to both giver and receiver (or donor and donee, if you prefer).


But listen, if you can keep a little extra money in your pocket by avoiding taxes on those donations, what's not to like?


Ok, here's the deal: lots of charitable contributions are tax deductible (you can use this IRS search tool to determine if your preferred charities qualify), but part of the Tax Cuts and Jobs Act (which will sunset next year) makes it very difficult for those donations to matter for tax purposes. In a nutshell, unless your itemized deductions – of which charitable contributions is one – exceed your standard deduction, it doesn't do you any good to list them. So unless your charitable contributions (plus other allowed itemized deductions) are more than $14,600 for single filers or $21,900 for married filing jointly, you won't see any tax benefit from them.


So what's a charitably inclined person supposed to do?


One excellent option is to condense all the contributions you would give later into years when you have a very high income. So let's say you're a single filer who normally donates $1,800 per year ($150 per month) and this has been a really successful year for you. You could choose to bunch ten years' worth of contributions into just one year, putting you at $18,000 in charitable donations – well above the $14,600 standard deduction threshold for single filers.


If you're donating cash, the maximum amount you can give in any year is a whopping 60% of your Adjusted Gross Income (AGI)! So if this is a really high income year, you could potentially group 20 or even 30 years' worth of contributions into this year and get a massive tax benefit.


You can also use this as an opportunity to donate other things like highly appreciated stocks. Remember that capital gains taxes are due whenever you sell appreciated stock and, although long-term capital gains tax rates are always lower than ordinary tax rates, you might be facing quite a tax hit if your stock is worth many times what you paid. But you can donate appreciated stocks (up to 30% of your AGI) and use that to offset current year taxable income.


What about if you don't have the income to support a large charitable contribution this year? You can use this same technique, but instead of pulling future contributions to the present, you can set money aside to donate later. For example, you could take that $1,800 that would have been donated each year, put it in a savings account, then wait until the balance of that account exceeds the standard deduction in the future. Great!


I know sooo many people who give to worthy causes and don't realize that they aren't really getting a tax break, so I really hope this helps add some clarity.


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Thanks,


Timothy Iseler, CFP®

Founder & Lead Advisor

Iseler Financial, LLC | Durham NC | (919) 666-7604


Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify current your strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.

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