RTS #058 Let’s make a deal

If I offered to give you 24 cents for every dollar you gave me…you’d shake your head and walk away, right? That sounds obvious, but where math gets hard when it gets buried in story problems, and that’s what the tax code is all about. Because while every one of your clients would walk away from this deal, at least some of them get caught up in the idea of spending money just to save on taxes, and the two places we see this most often are business expenses and charitable giving.

We’ve received a few versions of this question, but it regularly gets asked with all sincerity:

“What if I just gave some extra money to charity; would that help get rid of my tax bill?”

And the answer is “yes, but…”. Because yes, for some clients who can itemize their deductions, giving a thousand, or even ten thousand, is going to reduce their tax bill, but they still have to pay the rest of the tax bill and now are out the money to the charity. We need to focus on great life decisions and then figure out the most tax-efficient way to go about it. If the client was already planning to support the charity, great! Let’s get the tax deduction.

If, by donating to charity, the client reduces their taxable income far enough to get capital gains in the zero percent bracket, great! Let’s get that tax deduction.

If we are combining planned charitable giving to offset other income acceleration strategies (like Roth conversions), great! Let’s be proactive and reduce that lifetime tax bill.

Tax planning should not be “save at all costs.” No matter how much you love bunching or QCDs or DAFs, make sure you are starting with the client’s goals in mind (and helping them to remember what their bigger goals are along the way).

Happy Tax Planning!

P.S. The prevalence of these questions and the related opportunities is why charitable giving is featured prominently in our 37 points checklist for reviewing tax returns.