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Give From the Heart, Not Just for Taxes

By Joseph Clemens, CFP®, EA, Co-Founder/Owner of Wisdom Wealth Strategies

As we move into the season of giving, donating to worthwhile causes becomes a top-of-mind issue.  For many, it’s also a year-end tax saving strategy as taxpayers dig up as many deductions as they can before the turn of the new year.  But what about those who don’t itemize their taxes and claim charitable deductions?  Why don’t they get a deduction for charitable donations?  Or do they?

To “itemize” means to file an extra form with your 1040 known as Schedule A.  For those that don’t itemize their actual expenses, they can take a pre-determined “standard deduction” based on their tax filing status.  One of the largest determiners of who itemizes their deductions (and thus tracks items such as charitable deductions) is having to pay mortgage interest.  Surprisingly enough though, only about 30% of taxpayers itemize, and most of those are concentrated in higher income tax brackets.  Why should most taxpayers miss out on this (perceived) tax benefit?

Let’s be clear. Not itemizing is not necessarily a bad thing.  Many mortgage and real estate professionals use the concept to persuade homebuyers into purchasing when they aren’t ready, or buying more home than they need based on the perceived tax benefit.  I use the word “perceived,” because it can be exactly that when framed correctly.  Let’s take a quick look at an example:

John and Sally Nonitemizers rent a home and each make $50,000.  After their payroll deductions for 401k and health insurance, their joint income is $90,000.  If they were to itemize, they would have a deduction for $3,213 for state income taxes, $400 for personal property taxes.  They are considering a year-end gift of $500 to their favorite charity but don’t get to deduct it from their federal taxes because they don’t itemize.

Jack and Jill Itemizers are in the exact same situation, except they have a large mortgage, which gives them an extra $12,000 deduction.  Their combined itemized deductions equal $17,900.  They like the idea that a $500 charitable gift will save them about $100 in federal and state taxes.

Should the Nonitemizers let the lack of a federal deduction dissuade their gifting?  Absolutely not!  The IRS gave them a standard deduction of $12,600 in 2014.  This means they are getting a tax break without having the negative cash flow to get it!  If they make the $500 gift, that means their “itemized expenses” would have been $4,113, but in their case they are getting rounded up by over $8k to $12,600.  They also don’t have the record keeping requirements that that Itemizers family has. In addition, any additional gift over the $500 will give the Nonitemizers family a deduction at the Colorado level.   

This post isn’t taking a position on the merits of owning vs. renting, but what it is trying to convey is that a lack of a “direct” tax deduction should not be a disincentive to donating.  As we continue through the holiday season, remember gifting should come from the heart and not from Internal Revenue Code.

About the author: Joseph Clemens, CFP®, EA is a co­founder of Wisdom Wealth Strategies, a wealth management and financial planning firm located in Denver, CO. “Securities offered through Cadaret, Grant & Co., Inc, Member FINRA/SIPC. Advisory services offered through Wisdom Wealth Strategies, LLC; a Colorado registered 

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