Could someone explain tax advantages of charitable donations?

[tenant13]

Let’s start with this : I am not an altruist and do NOT want to donate to any charities UNLESS there’s a financial benefit in it for me. That may be the end of the discussion but the specific questions below:

Knowing that this only applies to itemized deductions and with the intention of using DAF every other year :

1. How would the math work if I donated highly appreciated stock (1000%) currently worth 15k if I’m single and in 22% marginal tax bracket? I know that I can go up to 30% of income deduction in that case but does that apply to the basis or the current stock value (so is it 1.5k or 15k?). If I were to sell that stock, tax in the CG would be almost 3k but I would pocketed 10k instead of giving it away.

2. Can ROTH conversion state tax (I’m in NJ) be deducted if itemized?

I was thinking about doing that in a year when I elect to have extra medical and dental expenses.

 

[ERD50]

Run your scenario in a tax program.

You are unlikely to see a pure financial advantage by giving to charity. You get a deduction, which is never more than the value of the donation.

If this is long term gains, probably 15% tax, or your 22% if short term. Assume it's all gains, 15 or 22% of the 15K is all you will pay in taxes, you keep the rest.

If you donate it, it's all gone.

There is a slim possibility, if you are in one of those weird edge cases where taxes stack up and there is a window of very high rates, that you might see a net gain, but I highly doubt it.

-ERD50

 

[cathy63]

1. If you've held the stock for more than one year, then your deductible donation is the value of the stock on the date the donation is made. In your example, you could deduct $15K as long as that is less than 30% of your AGI for the year and you haven't made any other charitable contributions.

2. State income tax is deductible subject to the $10K SALT limit. The source of the income being taxed is irrelevant.

 

[pb4uski]

Let’s start with this : I am not an altruist and do NOT want to donate to any charities UNLESS there’s a financial benefit in it for me. That may be the end of the discussion but the specific questions below:

Knowing that this only applies to itemized deductions and with the intention of using DAF every other year :

1. How would the math work if I donated highly appreciated stock (1000%) currently worth 15k if I’m single and in 22% marginal tax bracket? I know that I can go up to 30% of income deduction in that case but does that apply to the basis or the current stock value (so is it 1.5k or 15k?). If I were to sell that stock, tax in the CG would be almost 3k but I would pocketed 10k instead of giving it away.

2. Can ROTH conversion state tax (I’m in NJ) be deducted if itemized?

I was thinking about doing that in a year when I elect to have extra medical and dental expenses.

1. For highly appreciated stock, if you sell it and have $15,000 of gain, most likely you'll pay $2,250 in federal tax and some state taxes (let's say $750 for discussion purposes) but still walk away with $12,000. If you donate highly appreciated stock then you avoid forever that potential $3,000 in taxes but are till out $12,000.

2. All state income taxes are deductible if you itemize, subject to SALT of course. The cause of the state income tax is irrelevant.

 

[jebmke]

Run your scenario in a tax program.

You are unlikely to see a pure financial advantage by giving to charity. You get a deduction, which is never more than the value of the donation.

If this is long term gains, probably 15% tax, or your 22% if short term. Assume it's all gains, 15 or 22% of the 15K is all you will pay in taxes, you keep the rest.

If you donate it, it's all gone.

There is a slim possibility, if you are in one of those weird edge cases where taxes stack up and there is a window of very high rates, that you might see a net gain, but I highly doubt it.

-ERD50

I'd be surprised if there were a scenario (for most people) where there is a financial case. Assuming all the past great opportunities to tax loss harvest were not taken, the best alternative to avoiding capital gains tax is to never sell. The next best is to die and let heirs get stepped up basis.

 

[donheff]

If you are old enough to be making RMDs you can deduct direct qualified charitable distributions (QCD) off the top of your income, despite using a standard deduction and not itemizing. That is effectively, a reduction at your marginal tax rate. I rolled a portion of my TSP to a Schwab IRA account specifically so I could write annual charitable checks that count as QCDs.

 

[Gumby]

You raise an interesting question about what drives any of us to donate. However, unless you have some odd situation where your marginal tax rate exceeds 100%, I don't see a case where you come out ahead financially by donating anything.

 

[RE2Boys]

If you are old enough to be making RMDs you can deduct direct qualified charitable distributions (QCD) off the top of your income, despite using a standard deduction and not itemizing. That is effectively, a reduction at your marginal tax rate. I rolled a portion of my TSP to a Schwab IRA account specifically so I could write annual charitable checks that count as QCDs.

Just a bit of clarification. You do not need to be old enough for RMDs in order to make QCDs. You only need to be at least 70.5 years old to make QCDs. QCD always count as part of your RMD if so required.

 

[donheff]

Just a bit of clarification. You do not need to be old enough for RMDs in order to make QCDs. You only need to be at least 70.5 years old to make QCDs. QCD always count as part of your RMD if so required.

+1. I forgot about that since I am already in RMD land.

 

[disneysteve]

The reason to give to charity is to support causes and organizations that are meaningful to you. There's no net financial gain. If there is truly nothing you care about supporting, donating to charity would serve no purpose.


The only minor exception I can think of is things like museum memberships. We belong to one museum in Philly. Our membership fee gets us unlimited admission all year, discounted parking, a gift shop discount, and access to member-only events. 100% of the membership fee is tax deductible. It still costs us money but what we get in return is well worth it to us, and we're supporting their mission in the process.

 

[OldShooter]

Let’s start with this : I am not an altruist and do NOT want to donate to any charities UNLESS there’s a financial benefit in it for me. ...

Any time you donate AFIK you end up with less money than you had before the donation. The question is only "How much less?" The answer depends on tax considerations, several of which have already been mentioned. The short version is that, properly planned, you will be donating to your chosen charity some money that would otherwise be paid in taxes. Said another way, if you make a donation, you will end up with less money but not as much less as the total amount of the donation.

 

[tenant13]

Any time you donate AFIK you end up with less money than you had before the donation. The question is only "How much less?" The answer depends on tax considerations, several of which have already been mentioned. The short version is that, properly planned, you will be donating to your chosen charity some money that would otherwise be paid in taxes. Said another way, if you make a donation, you will end up with less money but not as much less as the total amount of the donation.

That - along with other replies - pretty much sums it up: I tried to let the tail (taxes) wag the dog (income) and it wouldn’t work. Not a huge surprise. I may revisit the subject later - for now I’ll be trying to spend down what I have. Still a few years to go (I’m 60).

 

[RunningBum]

[-]If you were $9 over an IRMAA tier then a $10 charitable donation would give you more than $10 of tax benefit. If the ACA tax cliff returns that would be another possible case. You would have to know by Dec 31 what your income was going to be for the year to make such a move.[/-]

Never mind, this reduces your taxable income but not the AGI that ACA and IRMAA use.

 

[Sunset]

[-]If you were $9 over an IRMAA tier then a $10 charitable donation would give you more than $10 of tax benefit. If the ACA tax cliff returns that would be another possible case. You would have to know by Dec 31 what your income was going to be for the year to make such a move.[/-]
.

<edit> Updated to not confuse folks </edit>

Thanks...... We could be close this year, so does this work even if just declaring the standard deduction ?

We always thought the standard deduction meant claiming charitable deductions was useless unless they are really big as in the thousands.

 

[audreyh1]

If you were $9 over an IRMAA tier then a $10 charitable donation would give you more than $10 of tax benefit. If the ACA tax cliff returns that would be another possible case. You would have to know by Dec 31 what your income was going to be for the year to make such a move.

No, charitable donations which normally use Schedule A will not reduce your AGI. Neither will a QCD assuming you’ve already met your RMD.

Thanks...... We could be close this year, so does this work even if just declaring the standard deduction ?

We always thought the standard deduction meant claiming charitable deductions was useless unless they are really big as in the thousands.

Standard deduction or whatever has no impact on AGI or IRMAA. You’ll have to find an actual loss to take that reduces your top line income for the year.

 

[marko]

No, charitable donations which normally use Schedule A will not reduce your AGI. Neither will a QCD assuming you’ve already met your RMD.


Standard deduction or whatever has no impact on AGI or IRMAA. You’ll have to find an actual loss to take that reduces your top line income for the year.

Is the same true if you itemize? If so where is the saving?

 

[Gumby]

Is the same true if you itemize? If so where is the saving?

IRMAA is based on AGI, not taxable income, so it is before deductions, whether standard or itemized. So you save only on the taxes paid at your regular marginal tax bracket and only to the extent that charitable and other deductions (SALT) exceed the standard deduction.

 

[GrayHare]

the saving comes when computing the taxes owed

 

[athena53]

Is the same true if you itemize? If so where is the saving?

AGI (Adjusted Gross Income) is pretty much everything you take in. It can be "managed" only to the extent you can control capital gains and losses, IRA withdrawals and Roth conversions. (It's one of the reasons I'm going to more ETFs- no giant capital gain distributions in taxable accounts that are out of your control.) AGI is used as a basis for IRMAA and ACA subsidies.

Where you save with charitable deductions is on your actual taxable income, which is NET of itemized deductions.

 

[RunningBum]

No, charitable donations which normally use Schedule A will not reduce your AGI. Neither will a QCD assuming you’ve already met your RMD.


Standard deduction or whatever has no impact on AGI or IRMAA. You’ll have to find an actual loss to take that reduces your top line income for the year.

Thanks, I've crossed out my post so no one is misled.

 

[audreyh1]

Is the same true if you itemize? If so where is the saving?

Yes, doesn’t matter whether you itemize or not. IRMAA is based on your AGI. Schedule A deductions can reduce your taxes, but not your AGI.

 

[Sunset]

No, charitable donations which normally use Schedule A will not reduce your AGI. Neither will a QCD assuming you’ve already met your RMD.

Standard deduction or whatever has no impact on AGI or IRMAA. You’ll have to find an actual loss to take that reduces your top line income for the year.

IRMAA is based on AGI, not taxable income, so it is before deductions, whether standard or itemized. So you save only on the taxes paid at your regular marginal tax bracket and only to the extent that charitable and other deductions (SALT) exceed the standard deduction.

Thanks.

Nice to get help to keep the tax concepts clear, as it is confusing at times.

 

[Al18]

You may want to investigate Charitable Gift Annuity. You give money to a charity, who pays you an annuity while you are alive, and the charity retains the balance afterwards. You get a partial tax break. I only know these exist, but don’t have any other info.

Nj has a retirement income exclusion, which reduces your state income tax for those 62 and older. For married couples, there is no NJ income tax on pensions or IRA withdrawals up to $100K per year. A RothIRA conversion looks like a withdrawal. Those making between $100K and $150K pay a reduced tax. Lastly, NJ does not tax SS benefits.

 

[pb4uski]

You raise an interesting question about what drives any of us to donate. However, unless you have some odd situation where your marginal tax rate exceeds 100%, I don't see a case where you come out ahead financially by donating anything.

+1

 

[Ian S]

Here in Arizona, we have some very significant tax credits geared towards several types of charities. These are dollar for dollar tax credits that offset your state taxes owed. For example for certain foster care charities, a couple MFJ can contribute $1000 and get an offsetting state income tax credit of $1000. Now, obviously, the state doesn't allow you to deduct these contributions as that would be in effect double dipping. However, I'm not sure if that applies to federal deductions. I haven't looked into it since we just take the standard deduction. These charities generally take credit cards for the donation so if you use a card that gives you airline points or cash back, you can get at least some tiny net benefit I suppose.