If you receive income from an organization to which you also donate, you may want to consider volunteering or taking a pay cut instead of donating.
Mr. and Mrs. Generous expect to earn $150,000 each this year and have no mortgage debt. Currently, their only potential itemized deductions are state and local taxes. Because of the State and Local Tax (SALT) cap created by the Tax Cuts and Jobs Act of 2018, they would only be able to deduct $10,000 of these taxes. Instead, they would take the standard deduction. We estimate their federal income taxes would be approximately $54,493.
Mr. Generous is approached about a part-time position at a non-profit they believe has a great mission. Mr. and Mrs. Generous have decided they do not want to be a net expense for the non-profit.
The non-profit has offered him $5,000 for his efforts. If Mr. and Mrs. Generous decide to accept the payment from the non-profit and make an equal donation, we estimate they will pay $55,693 of federal income taxes, a $1,200 increase! Their new total potential deductions to itemize ($15,000) are still less than the standard deduction, but they would increase their taxable income by $5,000. Depending where they live, they may even face additional state income taxes!
In contrast, if they turn down the money and choose to volunteer, they will not increase their taxable income.
Each family’s situation is unique. If Mr. and Mrs. Generous plan to apply for a mortgage next year, they may prefer higher income and higher taxes to help them qualify. Without knowing the family’s full circumstances, we cannot determine whether Mr. and Mrs. Generous should turn down the $5,000. However, comprehensive financial planning can help families efficiently achieve their philanthropic goals.
If you would like help evaluating your giving strategy, please contact us today!