Guided Path 7-2 Timing Your Donations

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In this episode, Zacc Call and Laura Hadley discuss the tax benefits of charitable giving, focusing on the strategy of "bunching" or "doubling up" donations. They explain the impact of the standard deduction on tax benefits and how timing donations can optimize tax savings. They also introduce the concept of a donor-advised fund (DAF) as a tool for controlling the timing of your donations and itemized deductions. They emphasize that the cause, not the tax benefit, should be the primary motivation for your giving–no matter where it’s going. Zacc and Laura discuss: The concept of standard deduction and how it affects your tax benefits, the strategy of “bunching” and “doubling up” your charitable giving, the role of donor advised funds (DAFs), how to better manage cash flow when you’re prepaying donations, and more.

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[00:00:00] Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have. Whether you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics into practical, actionable steps.

Our mission is to guide motivated people to become financially successful. Welcome to The Financial Call. We are on charitable giving. That is season seven. Still can't believe we're this many seasons in. Each season has between five or six episodes. If you are just picking up here and joining, you know, listening to the podcast, we hope that you are able to benefit from the rest of the seasons.

Understand that you're in season seven, so there have been six prior. Income planning, social security, investing, tax planning, estate planning, a whole season on business owners. And then now we are on a whole season of charitable giving. We put these seasons in an order that we thought would be most [00:01:00] appropriate, especially for someone who's 10 years away from retirement, what you'd have to really think about in the right order.

But it was also built so that if that's not you, if that's not your situation, and you really just want to look at tax planning, you can jump in right into season four. And consume all of those episodes. And each season is built to take you from simple to more comprehensive. So you start with season, or episode one, and then work your way up.

And by the end, you'll have a really comprehensive understanding of that particular topic. So, charitable giving. Last time, we talked about donating cash and donating stocks or assets. That was episode one within season seven. Today is episode two, timing your donations. This is huge. We're going to help you understand how people misunderstand their tax calculation and some of the big mistakes and how you can actually use that knowledge of the [00:02:00] tax, like how taxes are calculated, to save you thousands of dollars.

I know that it's a nerdy thing to be interested in taxes. It's not a nerdy thing to be interested in thousands of dollars. That you're saving. Yeah, exactly. For sure. And this is a common topic, this time of year donations, because the standard deduction is so high right now, so many people feel discouraged about their charitable, giving their charitable deductions.

They feel like they're not getting a tax benefit for it. And so this is a way we're going to give you a little secret of how you might be able to get more out of your charitable donations. While still taking advantage of the high standard deduction. I don't know how often you run into this, but I feel like I run into it pretty regularly.

That people think, they're thinking that they're getting a benefit from their charitable giving. And they have no clue that whether they gave to charity or not, it had zero impact on their tax return. Obviously, you give for a different reason than to save on taxes. You're giving to give and to create impact and to do good in the [00:03:00] world.

But it's sad when people think they're getting a tax benefit for it as well, and they're not. And they're not. Exactly. Let's backtrack a little bit and explain why this is the case. So, when you go and file your taxes, we have a whole season on taxes and how they work. You basically can choose... to deduct your taxable income two different ways.

You can take the standard deduction, which is just a set number. Everybody gets to deduct their income by this amount, reducing their taxable income right now for a married couple. It's 27, 700 for a single person. It's 13, 850. So no matter what deductions you had, whether you gave charitably, gave charitably.

Oh yeah. Wow. You're good. We're still mourning here. gived? I don't even know what I said, to be honest. I'm sorry for all you English teachers listening. And we don't edit out much either, so there you go. That's on there, that's on there. This is funny, I used to correct my dad on his grammar. I used to make money for it because my dad had some...

Oh, he gave you like a quarter every time or something? Yeah, I'd [00:04:00] say, hey dad, that's bad grammar, give me a quarter. So if he's listening, he might ask for a quarter or something. I had to up the antie, he wasn't learning, so it was to a dollar. And then finally we got to a certain amount of money and he's like, all right, I can't afford this anymore.

That's funny. That explains a lot. Whenever I write something like an article or something for our clients, I oftentimes pass it to Laura for her to proofread because she catches more than any of us catch. People are doubting that right now after what I just said. Okay, moving on. So you were talking about the standard deduction and if you had given or if you gave or if you gived a certain amount.

to charities and if it's underneath that amount, if all of your deductions are underneath that amount, you're just going to take the standard deduction. Right, because you take the higher of the two. Your itemized deductions, which is made up by the big three, your mortgage interest, state and local income tax, which is limited to 10, 000 and then what you gave charitably.

And so you add all those items up and if it's less than that standard deduction of 27, 000, you're just [00:05:00] going to take the standard, whether you donated 15, 000 or not. Now, there are more than those big three, just as planners, what we see on people's tax returns regularly is that the other deductions have such a minimal impact.

That it's really those big three. Are you paying mortgage interest? Are you paying state and local income tax? And are you giving charitably? Those are the big three. And those changed dramatically not too long ago. When the standard deduction doubled, Trump was trying to simplify the tax filing process.

And he doubled the standard deductions. And that was good in the sense that a lot of people benefited from it, but some people didn't because at the same time they reduced state and local income tax to a maximum of 10, 000. Before, you used to be able to deduct, like, let's say someone makes 400, 000 a year and they live in Utah.

They're probably paying about 20, 000 plus in just income [00:06:00] tax. Then there's property taxes on their home and other income tax that may show up. So, that person may have 30, 000 or more of state tax that they used to be able to deduct or take as a deduction. And now they can only do 10, 000. That was a little bit brutal.

Here's a little side tangent, if you happen to be a business owner, and you're listening right now, in 2022, towards the end of 2022, we learned and the IRS came out with a way for you to pay your personal state income tax from your business, and that makes it a business expense, and so then it reduces the amount of business income that flows through to you, so in essence, you get around that 10, Limit.

Salt limit. I learned about it in the end of last year and I'd already paid more than half of my state income tax for the year. So that was a little bit of a bummer, but this year I'm doing it all that way. I'm paying all my personal income tax through the [00:07:00] business and that is something the IRS has clarified that can be a business expense for the owner and make it happen that way.

Anyway, something to be aware of. Okay, the big three. Mortgage. State and local income tax and charities. So you take your total income and then you get to subtract some number, whether it's the standard number that the IRS offers or an itemized amount that you've listed out and itemized, and then the net number.

gets thrown through the tax rates and the first little section is taxed at 10%, the next section is taxed at 12%, and then the next section is taxed at 22%. Those numbers go up in the future. After 2025, those numbers are expected to go up a little bit. It'll be 10, 15, 25. And we're basically keeping it simple by talking about the first three.

But there are another three or four brackets above that. The highest bracket right now is 37 percent and the lowest is 10. Okay. So whatever your last dollar touches, [00:08:00] that dollar may pay 22, but it doesn't mean that every dollar pays 22. It's just the amount that goes over the line or spills over into the next bucket.

They call that marginal. That's what that word marginal means. So when you hear that your marginal tax bracket is 22 percent, your average tax rate might only be 9, 9, 10, 11. And they call that effective tax rates. So you have your marginal, which is the highest rate you pay and your effective, which is the average rate you pay.

Now they take your net income after deductions, throw it into that, into those buckets and see what it spills over to average out your tax rate overall. And that's the amount you pay on your tax return. So the question here is. So we're talking about charitable giving. Can you time your donations in a way that will improve the overall net tax you pay by controlling the timing of your donations?

And the answer is absolutely you can. We're [00:09:00] basically deducting those last dollars. So your last dollars are falling in the highest tax bracket. So if we can get rid of or, you know, erase some of those last dollars through these different deductions. You're going to be saving the most on those dollars.

Yeah, absolutely. That makes sense. Imagine someone in that 37 percent tax bracket and they're in Utah, so they pay about 4 or 5 percent state. They're at about 42 percent overall tax rate. So if they can give 1, 000, they're going to save 420 on every 1, 000 that they give if they're actually getting to deduct it.

Now if they're still within inside the standard deduction, it doesn't matter. If they're beyond the standard deduction, every 1, 000 that they give, they get 420 back. That math is a little bit high because that's the highest tax bracket. But someone in that, let's call it 24 plus the state tax rate here is about 29.

So they get 290 back for every 1, 000 they give. So that's a big deal. Especially if you were [00:10:00] going to give anyway. So, let's talk about how this works in terms of timing it. The strategy is used There are two terms that we hear oftentimes, often, about this particular timing strategy. It's called bunching or doubling up.

I don't love doubling up because I had someone do seven years worth at once. So it's not doubling, it's, you know, these seven times seven, right? Okay, so the idea is you combine multiple years of charitable giving into one year, which means that you will exceed the standard deduction by quite a bit. And we'll give you an example here, which will bring it home numbers wise, okay?

But then, let's say you really bunch them up, and maybe even prepay. So this works really well for regular charitable givers. And that oftentimes includes people who give to a local cause that they just really believe in. Maybe it's like a food bank, a symphony, a school, a college, or something that they know that they're going to be [00:11:00] contributing to.

It also works really, really well with folks who pay a tithing, like that one is probably one of the most regular charitable contributions. They know they're doing a very specific amount every year. They know pretty carefully what it's going to be every year. So they can control that. And so if you can pay up a couple years in advance, then you'll get a much greater itemized deduction that year.

And then the next year, you'll use the standard deduction. So you go itemized. Let's do pretend we're just doubling up. It's every other thing at that point. You do itemized in year one, standard year two, itemized in three, standard four. And the most difficult part about this is just managing the cashflow.

Coming up with the money to actually make the donation happen in advance. I've known a lot of people who might give 10, 000 to a charity each year, but it's a significant portion of their income. So to give another 10 in year one is just too difficult. Depending on how you feel [00:12:00] about it, a strategy for that is you could save up all year, and on January 1 of the next year, pay the 10, 000, and then let's say 2023, you haven't paid any to charity yet, and on January 1, you pay all of your 2023's charitable amount that you want to give, and then through the rest of 2024, you do the other 10, 000.

Well, all 20 counted in 24. So that's one way of handling it from a cash flow standpoint. Some people, if it's a particular, especially when it's a religious type, they, they have feelings about how and exactly when it needs to be paid, and so we're not going to get in that. We're not your ecclesiastical leaders.

Let's just say that. But we do know how the taxes work, so that's up to you. So then, the benefit is, any amount that exceeds the standard deduction is going to reduce your tax bill because it reduces your income. We already talked about it. Per thousand dollars. You're probably saving somewhere between two and four hundred dollars.

So, let's talk about some tips on how to do this. Plan [00:13:00] out multiple years, and consider whether that impacts your giving needs, like the real reason you give. So you really want to think about, okay, why am I giving? It's not just for the tax benefit, because a thousand dollars to you is worth more than four hundred dollars to you.

Sometimes I hear that often actually. They're just going to donate to save on the tax. Yeah, it's like, well, kind of. Yeah. And I tell you, I promise no business out there is just looking for deductions. I get that question a lot. Is the business looking for a tax deduction? Kind of. The business would like to keep its money.

But is your cause worthy? Like that's different, right? So let's go through, I'm actually going to skip before we go into things to be informed about and consulting people. I'm going to skip and go right to an example. Is that okay, Laura? Perfect, yep. Okay. So let's say, so we have somebody that we've looked at, they have 10, 000 of state and local income tax because they maxed it out.

And they have zero mortgage interest because they paid off their home. They give 15, 000 to charities every year. [00:14:00] So we add those two things up, the state and local income tax. And the charitable giving, no mortgage, so that's a zero. It's 25, 000 total. That couple does not itemize. We're talking about a couple in this case.

that files taxes jointly and they could just take the 27, 700 instead. The 27, 700 is going to reduce their income by 2, 700 more than if they itemize. And the tax form is going to automatically handle this for you. So you don't have to worry about like, Oh shoot, did I itemize or did I do the standard? I mean, if you're using TurboTax, if you're using the tax forms and following it manually.

It tells you what numbers to put in based on which is higher, so you're good. The problem here is this person, this is the example that we talked about earlier. Where they're like, Oh, I gave 15, 000 to charity. I got a lot of tax benefit out of it. Yeah. Like, I hope you feel good about it. gave 100, you would be in the same position tax wise.

Or nothing. Or someone who gave nothing would be in the same position tax wise. So true. How do you [00:15:00] improve this? Well, if this person is going to give 15, 000 next year as well, and they're able to give that this year, well, now they've done 30, 000 of charitable giving, and they also have that same 10, 000 of state and local income tax.

So now they're at 40, 000 total. Then the idea there is that there's 12, 300. More than the standard deduction in the itemizing year. So we're subtracting 27, 700 from that 40, 000 to figure out how much more above, because if they give the 15, 000 every year, they're going to do the standard deduction every year.

So they're going to reduce their income by 27, 700 this year. They will reduce their income by 27, 700 next year. It's the same. But, the idea is, how much can we sneak out above that standard deduction in either year? Knowing that they'll take a standard deduction next year. Okay, so it's 12, 300. Now let's say that [00:16:00] this person is in a 24 percent federal, 5 percent state, that's 29 percent tax bracket.

They have saved 3, 567 every other year by bunching up every other year. In tax savings. Dollars in your pocket. Pure dollars in your pocket. Which is a big deal just for changing the timing. They didn't donate more. They just did it January 1st, rather than all of 2023, January 1st of 2024, just delaying it even by a day or 12 months or however you do it or front loading it or just doing it in advance, like however you can handle it.

Exactly, and I think something to point out, so it's kind of an obvious example, if all of your itemized deductions add up and they're less than the standard, clearly, this is a no brainer to bunch and double up your donations. So that you can get a little bit more. But some people, let's say this person's donating 20, 000 and their state and local income tax is 10, 000.

So they're getting 30, 000 to [00:17:00] be able to itemize each year. Well, they might say, well, Zacc, I'm getting a better benefit for itemizing anyway. Why would I need to double up? But the fact is. Some of your charitable giving is still falling under that standard deduction amount, and so you're not taking advantage of all of those dollars given.

That's right. In that case, let's see, they have 30, 000 of deductions, so they're really only getting a benefit. for the 2, 300 that goes over. For their charitable giving, yeah. Yeah, and if that person went every other, all 20, 000 would sit outside of the standard deduction in year one, meaning year two's contribution of 20, 000, if you could stack that on top of year one in that same situation.

It's 20, 000 more of itemized deductions that they would have. And at that 29 percent tax bracket, it's actually a little bit less because a little bit sneaks outside in year two. So they would itemize both years. [00:18:00] Sorry. Let's just take a step back here. A lot of math. And I know you're just listening and not like watching, but here's how it works.

Lara's example is a great one because this is a common problem. People think if they itemize at all, that they've itemized optimally. And that's not true. If any of your itemized deductions that you could control in time are straddling that standard deduction line, there's an opportunity there. In this case, because they stack the 20 on top, they're probably getting another.

17, 700 extra deductions and multiply that by your tax rate, that's going to be like a 4, 000 tax savings in that year. Which is great. Okay, so, good example, I like that. Let's talk about a couple of ways to make this work for you. And this will be a pretty short episode because we're cutting right to the chase.

and want to help you understand. So the summary is you are either standardizing or itemizing your deductions. The net amount flows through the tax [00:19:00] brackets and if you can control your itemized deductions in a way that allow you to itemize and then standard, that's going to help you out. For some people, if their non movable deductions are always above, if you have a big mortgage, yeah, exactly.

You're not going to really be able to control your mortgage interest. Let's say that your state and local income tax and your mortgage interest surpass just by themselves. They surpass the standard deduction. The timing thing isn't really going to is all sitting on top of that standard anyways. So you're getting the full benefit for it.

Yeah, whether you give all at once or whether you give each year, it's going to have the same mathematical impact for you. That's something to understand is... But like you may hear bunching up and doubling up and oh, there's such a great strategy. But then if you have a decent sized mortgage and you max out the salt, then you're probably not going to benefit from it.

Now if you're a business owner and all that state and local income tax now gets pushed through to your front as a deduction on your business side, then your mortgage interest [00:20:00] drops a little bit because you don't have that 10, 000 base of state and local income tax in your itemized deductions. And now all of a sudden, maybe you are straddling that line.

Anyway, the point is, if any of your charitable giving falls below the standard deduction line when stacked on top of all of your other deductions, there's an opportunity here for you. How do you think about this? Okay, one, do decent job of keeping records. Look back at your old charitable giving and think about which of those charitable gifts might you be able to control in terms of the timing.

And then talk to an expert, your tax professional. a financial advisor that understands taxes. In all fairness, a lot of financial advisors are investment managers or insurance people only. They won't tell you that, but that's something you will have to figure out. Like, does my financial professional understand these tax concepts?

And if they do, they could help you. I mean, we pay for tax auditing and mocking scenario software to be able to draw up different scenarios and see how it would impact [00:21:00] someone's situation. And then we also put down here, be aware of tax law changes. I mean, that's where if you have a good professional, you don't have to really study as much.

But I do know we have some people who listen, who are DIY types. And that's great. That's the whole reason we put this out here is that you get good information either way if you need our help or not. But if that's the case, stay informed on the standard deduction and income limits so that you are aware, because those standard deduction lines are changing every year.

And so you might find the bunching up is less beneficial or more beneficial to you based on just normal tax changes. Okay, a couple other things for you to think about. We will talk about in two episodes from now, it's episode four within charitable giving, a donor advised fund. And we'll wrap up with this, I think.

A donor advised fund is like having your own personal little charity account. Some people... are very concerned about the timing of their donations hitting the end charity at the right time. But they [00:22:00] want to be able to control the timing of their itemized deductions. And that is the perfect use of a donor advised fund, where you can put the money into your little charity account, get the itemized deduction in that year, but then maybe over the next 3 or 4 or 5 years, you distributed it out.

That's how we did the 7 year one. I was just going to bring up that example. Yeah, they don't want the charity to get 7 years worth. Yeah. Right at once. Yeah. All at the same time. Yeah, and it goes both ways. Maybe they don't want to give that much to the charity that early or maybe they're worried about not giving enough to the charity each year because they feel an obligation or they made a contract of some type or anyway, so it goes both ways.

A donor advised fund allows you to control the timing of the deduction by dropping it into the account, getting the tax deduction, and then controlling the time. distributions. The other great thing, we talked about giving stocks versus cash last time. A donor advised fund can receive positions easier than the other charities can.

The other charities just get a check from the donor [00:23:00] advised fund. And then lastly, we'll go over this as well, but if you're selling a business, you can sometimes use a donor advised fund to be added on as a partner in the transaction. And then not only do you get the itemized deduction of the gift to the donor advised fund.

The Donor Advice Fund doesn't experience capital gains tax like you do. That's where we've seen people give a million dollars to a Donor Advice Fund of a 10 to 20 million dollar transaction and they're saving 300, 000 plus dollars in taxes because they don't have to experience. That capital gains and there are some fees and costs associated with that appraisals and we'll go over some of those things in the future, but just understand that's a little teaser of what's coming for the rest of this season and there's a lot to know about there, but the DAF could be a good, DAF is the acronym for Donor Advice Fund, but the DAF could be a really good tool for you to handle The timing of your donations, which is what this episode today was about, timing your donations, controlling your itemized deductions, and maximizing the benefit you should get by giving even the same amount you [00:24:00] would have given anyway, which was your point, Laura.

You're giving the same amount, but just getting a better tax benefit. Exactly. And lots of these you can stack together, so be sure to listen to this whole season and see. What applies to you and how to fully maximize your taxes. Thank you. This podcast is intended for informational purpose only and is not a substitute for personal advice from Capita.

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