[Case Study] How to Turn Charitable Giving Into $100k+ Tax Deductions

On this episode of the Ready for Retirement podcast, James discusses a strategy for increasing your tax savings through charitable giving. James gives the example of a couple who contributed $12,000 to charity every year but they were still taking the standard deduction every year on their taxes, so they were never able to reap any tax deduction benefits from their contributions.

He helped them set up a Donor Advised Fund into which they could contribute a large sum of money that could be distributed at their discretion over the next few years while providing them a significant tax savings in the process.

This is a great strategy for folks who do not qualify to itemize their deductions but are contributing significantly to charity throughout the year, but there are other beneficial strategies for other situations as well. Don’t feel limited by what you “qualify for”, because you likely fall into multiple categories and a financial planner can help you navigate these dynamics.

Key Points:

1. Tax deductions in regards to charitable giving
   • Standard deduction
   • Itemized deduction
     • Charitable contributions
     • Mortgage interest
     • State and local taxes
     • Other considerations
2. Case study
   • A couple, both age 60
   • $12,000 of charitable contributions per year
   • $25,000 of state and local taxes per year, but capped at $10,000
   • No mortgage interest
   • $22,000 in itemized deductions, so standard deduction is higher
3. Strategy for this case
   • Open a Donor Advised Fund
   • Lump sum contribution
   • Immediate tax deduction
   • Funds can grow until they are contributed
4. When this strategy makes sense
   • A decent amount of annual planned giving
   • No mortgage or small mortgage
   • Medium to high tax bracket
5. When this strategy doesn’t make sense
   • If your investments are in IRA or Roth IRAs rather than cash
   • If you would have itemized deductions anyway
6. Benefits of this strategy
   • You can donate appreciated stock or illiquid assets
   • Control the timing of your funding
   • Opens up other tax planning options

Timestamps:

0:08 – The topic of this episode: charitable giving

1:02 – How the changes to the tax law in 2018 could affect your tax savings

1:40 – The standard deduction

3:47 – The case study details

7:45 – The strategy for this case study

12:30 – When this strategy makes sense

14:08 – When this strategy doesn’t make sense

16:22 – The benefits of this strategy

19:29 – Other variations of this strategy