Technical Opportunity : Reducing Taxes, Optimizing Giving

Accidental Philanthropy

The majority of people do accidental philanthropy. They pay taxes and the government chooses how to use those taxes for the common good. You can transfer your accidental philanthropy to intentional philanthropy. Do you grin when you pay your taxes? It probably looks more like a grimace. Want to grin while you write your check or pay out of your donor advised fund to something you believe in? We hope you will be grinning from ear to ear. You cut out the middle man, Uncle Sam, reduced or eliminated wasted money, and made a priority of something you believe in and value. If you can't grin big about that, then we suggest you get some help.

Let's look at five simple steps of giving-centric bracket clipping. Do you want to move more of your tax dollars into charitable dollars? Clip your tax bracket through your charitable gifts and optimize both.

Tax Reduction

Reducing your taxes takes the experience and training of a specialist. Be sure to work with an advisor who can help you reduce your income tax, capital gains tax, and estate tax where appropriate. 

Understand Your Income Tax Bracket

Understand your income tax bracket and how tax brackets work. Review the table below for some federal tax rates. Your state tax will vary. 

	Married Filing Jointly	Single Filers
Tax Rate	2004 Taxable Income	2004 Taxable Income
10%	Not over $14,300	Not over $7,150
15%	$14,300 to $58,100	$7,150 to $29,050
25%	$58,100 to $117,250	$29,050 to $70,350
28%	$117,250 to $178,650	$70,350 to $146,750
33%	$178,650 to $319,100	$146,750 to $319,100
35%	Over $319,100	Over $319,100

Federal Taxes for Married Filing Jointly and Single Filers for 2003. 

Click here for 2004 estimates for taxes.

This is not exactly correct, because the government gives you at least a standard deduction against the income — $4,850 in 2004 if you are single and more if you fit other categories, such as if you file taxes as a married couple. Put this together, and you get to earn over $33,900 ($29,050 + 4850), before you really hit the 28% bracket for incremental amounts that you earn, and so on up into the higher tax brackets.

Waste Management: Income Tax Dropping to a lower tax rate can mean significant savings. Use these strategies to reduce your tax rate when you can. Remember that you can drop to the next bracket at the taxable income amount plus the standard deduction.

Give Money to Charities

Giving money to charity allows you to deduct the amount of the donation from your taxes when you itemize your tax deductions. For every dollar you give, you get a proportionate reduction in your taxes. Many people align their donations with their income bracket to get a bigger bang from the money they donate.

Percent Limits to Deductions Congress limits deduction for property like stocks to 30% of your adjusted gross income and to 50% for cash and equivalents. For example, if you make an income of $100,000 this year and give a stock worth $40,000 to your Donor Advised Fund, you can only deduct $30,000 of the donation against your income this year. You get to carry forward the deduction for the other $10,000 to offset income next year.  The tax brackets are graduated—the rates go up as your income rises. The more your income, the higher your tax rate. As a result, smaller donations can cut a disproportionately larger amount of your taxes. The $30,000 donation in the above example comes close to cutting the income taxes on a $100,000 income in half .

Here are four tactics to help you optimize:

1. Donor Advised Funds
2. Giving Appreciated Assets
3. Gifts other than Cash
4. Tax planning to Expedite Family Wealth

Donor Advised Funds:

If you do not have a clear giving plan, a donor advised fund can be used to make a charitable contribution at this time. Donor Advised Funds work much like a charitable checking account and can be opened at your community foundation. Some restrictions apply. If you do not contribute enough annually to your causes to make it worthwhile to itemize your deductions, try lumping your gifts into your DAF on alternate years. Contact your causes for other strategies for managing your gifts and your income tax.

Waste Management: Group Your Contributions for Deductions If you do not itemize your taxes, then bunch your contributions together in to a single tax year so that they can be deducted.  If you normally give money to charity or your religious institution, make arrangements with that institution to pay two or more years' worth of donations in one tax year.  That way, the amount you give may be deductible.  If you do not give to a single institution, then donate funds to a Donor Advised Fund at a Community Foundation.  You deduct the money when you give it and designate the charities of your designate the charities of your choice over time.

Giving Appreciate Assets

If you want more income, donating an asset can often help.  If you have appreciated assets, such as a stock that has appreciated, donate it instead of selling it.  You avoid paying the capital gains tax you would have paid.  This also gives you a write-off in the amount you donate.  The result — you have more to give, rather than selling the asset, paying the taxes, and then only gifting the remainder. 

Molly, in the last five years of her work life, donated appreciated stock every year to her Donor Advised Fund.  Rather than pay taxes at the highest marginal bracket on her income, she had tax write-offs that reduced her taxes tremendously.  When Molly donated the asset, she gave up very little income because the stock didn't pay very much.  But she was able to reduce the tax rate on the top 1/3 of her income to nearly zero.  She had more after tax income which she chose to invest in similar stocks .

Tax Planning to Expedite Family Wealth

Think short term AND long term. Optimize your bracket now and in the future. The financial points of greatest change are likely to coincide with your greatest opportunity to optimize your taxes and your giving. Be sure to take advantage of selling a business, balancing capital gains and income tax, low income years, and any other significant change in your finances. Also, consider the finances of multiple generations. It can be more beneficial to everyone for you to contribute to the down payment of a house than to give a large bequest thirty years later.

Estate Taxes

Spousal inheritances do not pay estate tax, but other beneficiaries pay estate taxes on estates valued at more than $1.5 million. And the taxes can be steep. The inheritance beyond the $1.5 can be taxed at 40% or more! Work with your advisors to rearrange your estate. Depending on your circumstances, giving annual gifts might be enough or perhaps your advisor can set up a trust. Trusts paying out to charity can help significantly. Adjusting the value of the estate can help too.  Consult your advisors.

For excellent examples and explanations, please see our friend, Vaughn Henry's website: http://www.gift-estate.com.