A series of strategies for tax-wise investors. Table of Contents.
Philanthropy
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Billionaires easily deduct their philanthropic contributions. Moderately prosperous people have to get creative.
This year you get a $25,100 standard deduction on a joint return ($27,800 if you are both at least 65). The limit on deductions for state and local taxes is $10,000, so you need more than another $15,100 of itemized deductions in order to do better than you would with the standard deduction. This means that if you aren’t paying mortgage interest, your first $15,100 of charitable effort buys nothing at tax time.
One solution, available to oldsters, involves an IRA (see Optimize Your Charity By Using Your IRA).
Another solution, available to everyone, is to bunch up charitable donations. Instead of giving away $10,000 a year, you put, say, $60,000 in a donor-advised charitable fund of the sort managed by the big brokerage firms. Then you dish out the money over perhaps six years (there’s no deadline).
In the donation year you itemize deductions on Schedule A. There, you are likely to have a total deduction of $70,000 or more. (It would be hard not to have at least $10,000 in property and state income tax to claim.) That means you are getting mileage out of $44,900 of your $60,000 charitable donation. For the following five years you use the standard deduction.
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The donor-advised strategy can be combined with another gimmie. When you donate appreciated assets held for more than a year, your charitable deduction is calculated from the assets’ current value, but the appreciation is never included in your income. (This is a deliberate loophole, intended to help charities.)
One negative: These broker-managed donor funds have fees. Over a stretch of years they cut into your philanthropy.
Will legislators go after these donor funds? There are reformers who condemn the delay in disbursements; they say that if the donor is getting an immediate tax deduction the charitable help should go out immediately. A crackdown, though, would diminish the donor’s enthusiasm. Not helpful.