When should you give to charity?

American taxpayers gave over $420 billion to charity last year. Those gifts (which ranged from large corporate donations to small donor contributions of less than $25) support a wide-range of non-profit organizations that include non-profit schools, churches, synagogues, mosques, large nationally known non-profits, and small soup kitchens.

Supporting a charity is a great thing to do, and it’s nice that it comes with tax benefits as well. But did you know that the timing of a charitable gift can potentially save you money? This is especially true now after the passage of the Tax Cuts and Jobs Act of 2017, which, among other things, doubled the standard deduction.

Each year you have a choice between itemizing your deductions (ex: charitable gifts, $10k of state and local taxes, mortgage interest, etc.) or taking the standard deduction, and in virtually every return it makes sense to take the larger of the two. The standard deduction for most individuals is $12,200, for married couples and qualifying widow(er)’s it’s $24,400 and for individuals filing as Head of Household, it’s $18,350.

This means practically that if your itemized deductions total less than your standard deduction, you don’t actually deduct charitable gifts (or other itemized deductions). If they total more than the standard deduction, you’d itemize.

I’ll give an example of this principal in action. Imagine a hypothetical taxpayer named Edgar. Edgar gives $10,000 to a 501(c)3 charity every year. He doesn’t own a home (so no mortgage interest) and he lives in the recently formed US state of Taxhavenia, which doesn’t have an income tax, sales tax, or any property taxes. The state makes all of its money from parking enforcement, which is ruthlessly efficient and levies fines that could bankrupt a small company.

Since Edgar is single, his standard deduction is $12,200. His $10,000 in itemized deductions are less than the standard deduction, so each year he ends up taking the standard deduction. For 2019 and 2020, he would be deducting a total of $24,400 ($12,200 x 2 years).

But what if Edgar gave both of his $10k gifts in 2019 instead (or saved them both for 2020)? In that case, he’d deduct $20,000 in one year, and $12,200 in the other. In the year that he gave $0, he’d still get to take the standard deduction, but in the year that he gave the double gift, he’d itemize.

Just by changing the timing of one of the gifts, Edgar got to deduct an additional $7,800. That might save him $2-3k in taxes in the end.

This strategy doesn’t work for all taxpayers but if you want to know if it would work for you, feel free to contact me and I’ll find out for you. The worst case scenario is that you save nothing, but the best case scenario is that you could save thousands in taxes, all while continuing to give to your favorite charity.

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