We’ve talked a lot about reducing your taxes. Honestly, like most people, I only want to pay the tax that I am required to… nothing more. “Lumping” your charitable giving is one of the most effective ways to reduce your taxable income. Like other forms of giving, this tool is useful for those who are already giving and have charitable intentions.
Who it works for:
Gift lumping works for people who don’t normally get to itemize their deductions. Because their charitable giving is “too small” or below the standard deductions listed below, they don’t really get credit for their giving. Well, at least not credit when it comes to tax savings.
So, for example, you have the following tax deductions:
- $10,000 state and local tax
- $15,000 charitable giving
Hmmm. That only gets you to $25,000 of deductions. That means if you are married filing jointly, you might as well just take the standard deduction of $25,900. Your giving isn’t recognized!
How it works:
If you could get 2 years’ worth of charitable giving into one calendar tax year, you could take the itemized deduction one year and then the standard the next! Then you keep giving every other year.
In example, you donate $15,000 to your favorite charity in January of 2023 and then another $15,000 in December of 2023. You then hold off all your giving until January of 2025. For all intents and purposes, your charity is getting support for 2023 and 2024 (they are just getting the 2024 gift one month early) … but YOU are getting double deductions in one calendar year.
So, in 2023 here are your ITEMIZED deductions:
- $10,000 state and local tax
- $30,000 of charitable giving
Then in 2024, your standard deduction would simply be the $25,900 (or more depending on how the standard changes by then).
THAT MEANS YOUR INCOME WOULD BE TAXED BY $14,100 LESS IN THOSE 2 YEARS THAN IF YOU HAD STAYED WITH YOUR NORMAL GIVING SCHEDULE! ($40,000 – $25,900 = $14,100).
What does that mean for you?
It means that in 2 years, someone in the 24% ordinary income tax bracket could save $3,384 in taxes owed… aka a free mini vacation for you. Again – you didn’t give any more money than you normally would have – you just gave it at a slightly different time!
You might think – well my charity is used to getting monthly checks from me! I can’t simply wait an entire year to give them another check.
The Solution to that “But”
One of my favorite tools is the Donor Advised Fund (DAF). You can fund a DAF with money or investment securities at any time. The DAF itself is a “charity,” so you get your tax deduction whenever you put money into the DAF. Then, you can slowly pay money out to your favorite charities over time straight from the DAF. It’s almost like a charitable checking account.
Give because you want to give. It is ok to get tax-benefit from those gifts! If you want to be even more charitable, view your tax savings as simply more money that you can give to your favorite charities (rather than the government).
Charitable giving and tax planning can be tricky, so be sure to work closely with a professional!