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The Tax Cuts and Jobs Act that passed in 2017 dramatically impacted the charitable giving tax benefits for most taxpayers in the United States. Under the previous tax rules, 32% of taxpayers itemized the deductions on their tax returns and received a benefit for the charitable contributions that were made. Today, roughly 13% of taxpayers itemize their deductions, and the remaining 87% of taxpayers get no benefit for their charitable giving. While tax savings should not be the primary goal when giving money to charity, being strategic and tax-efficient when being generous can empower you to gift even more in the future.
The Standard Way of Giving
Most taxpayers contribute money to their favorite charities - whether it be a church, a health organization, a relief organization, etc. - on an annual basis. Unfortunately, this method is also the most inefficient way of giving.
Consider the following scenario: A married couple with $8,000 in real estate taxes, $5,000 of state income taxes paid, $9,000 of deductible mortgage interest, and $10,000 of charitable contributions.
Due to the $10,000 limitation on State and Local Taxes (SALT), the total itemized deductions are only $29,000 ($10,000 SALT taxes, $9,000 mortgage interest, and $10,000 charitable contributions). Compare that to the standard deduction in 2021 of $25,100 and you can see the married couple only received credit for $3,900 of their charitable giving. This results in a tax savings of only $936 on a gift of $10,000 if the couple is in the 24% marginal tax bracket. This means that over a 3-year span, only $2,808 of tax benefits were captured from $30,000 of giving.
Bunching Deductions
One way to maximize your charitable contributions is to contribute to a Donor Advised Fund (DAF). A DAF is an account that can accumulate funds while giving you full control over when to distribute those funds and what charities will receive the funds. The benefit of a DAF is that you can maximize your tax deductions to save more tax dollars or give more money away to the organizations you care about.
Let’s assume the same facts in the previous case, but change the scenario so that the married couple donates $30,000 to a donor advised fund in year 1 and then distributes that $30,000 evenly over years 1, 2, and 3 to their favorite charities. In year 1, their itemized deduction would be $49,000. Now, this couple is getting credit for $23,900 of their total gift, and their total savings equate to $5,736 at the 24% tax rate. Even though the married couple does not have any deductions to claim in years 2 and 3, the standard deduction is high enough that their economic benefit is more than doubled over that same 3-year period.
What’s Even Better than a Donor Advised Fund?
Getting the best value for your charitable giving will depend on which state you live in and where your passions lie. If you have a passion for education, a scholarship tax credit is a state-organized program that provides a tax credit for donating to various private schools. For this example, we will look at Illinois’ Invest in Kids program.
Once again, let’s use our previous married couple with $200,000 of income. By donating $10,000 to their charity of choice, they receive a $936 tax reduction on their federal taxes. If this same couple were to donate through the Scholarship Granting Organization (SGO) program, Illinois will give them a 75% tax credit on their donation. This means that their $10,000 donation will result in $7,500 being taken off their Illinois income tax bill.
| Traditional Giving | Donor Advised Fund | Scholarship Granting Organization |
Income | $200,000 | $200,000 | $200,000 |
Donation Amount | $10,000 | $30,000 | $10,000 |
Tax Benefit ($) | $936 | $5,736 | $7,500 |
Tax Benefit (%) | 9.36% | 19.12% | 75% |
To see how the SGO program could benefit you, use our online calculator to determine the impact of your gift.
According to a 2017 study, there is a direct link between happiness and generosity. Even if tax savings isn’t the main goal of your generosity, being strategic can increase the economic impact of your gift, allowing you to give more in the future.
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