Tax Optimization and Charitable Giving

How are we reacting to the new Republican tax law?

Well, I’ve crunched the numbers and my partner and I will be around $3-4k short of the new standard deduction, not including charitable contributions. This gap will widen over time as we pay down our mortgage and our interest deduction declines.

Since we plan to continue donating 10% of our net income, we can pretty easily surpass this $3-4k gap each year if we give as normal. But it would be more tax efficient to bunch our giving so that we give the same amount on average, but only every other year. Applying such a strategy would net us an average of $385 in greater tax refunds every year (growing slightly over time). Not a life changing amount, but not chump change either.

The big downside to such a plan is that we would, in essence, be “delaying” charitable donations which could be well used by our favorite institutions sooner than later. I put a pretty high discount rate on donations– I think $50 to a cause today is worth way more than $50 to a cause a year from now. Because who knows what the world will look like a year from now. Plus, if we lived our whole lives around financial optimization, we wouldn’t be giving this much to begin with.

Alternatively, we could “prepay” charitable donations a year early. Which, if you believe the stock market will continue its bonanza of 20% annual increases, means we’ll be missing on non-trivial market gains.

So where does that leave us? To bunch or not to bunch?

Since we “prepaid” a lot of our charitable obligation for this year, I am inclined to donate the remainder of this year’s charitable obligation and then “prepay” next year’s obligations into a donor advised fund. From an efficient giving standpoint, I still think it is better to just donate the extra to charity now and eschew the DAF altogether. But from a mental accounting standpoint, having the money under my “advisement” (read: basically under my control except legally?) is strangely comforting. Plus, setting up a charitable foundation in anticipation for our wedding might be nice. Have our guests donate into our charitable pot rather than buying us a toaster oven we’ll never use.

Are you changing your tax strategy due to the new tax law? Will it affect your charitable giving?


‘Tis The Season For Charitable Tax Deductions

When I graduated college and started working I donated about 2-3% of my post-tax income to charity and sent an additional 2-3% to my brother for his college expenses. For a while this made me feel good; I was hitting my savings goals and giving back a little on the side.

But over time, as my income and wealth increased, I felt guilty. I earned more than I needed and had somehow ended up on the “right” side of this country’s inequality problem. Morally, I did not feel like I deserved the money I received (and still don’t) and I felt like the wealth I was accumulating was unfair. I had to do more.

Starting last year, I made the commitment to give away 10% of my post-tax income, including those aforementioned family “donations”. I do post-tax income because I feel like I never see the money that goes to Uncle Sam. I do 10% because I grew up around very religious folk and felt like, though I’m not religious myself, I wanted to have something akin to a secular tithe. An amount that felt “moral” but not like I was giving away the farm. Something that was just the right amount of painful.

As I mentioned in my credit card churning post, I have a big $10,000 expense coming up. What I didn’t mention is that big expense is my end-of-year charitable donation flurry.

Note that I’ve been donating money throughout 2017 and $10,000 was a lot more than I was expecting to donate at the end of this year. I’ll be way over 10% post-tax for 2017. But, because of the tax bill in Congress and my changing marital status, I’m not sure I’ll be itemizing my deductions going forward, so I decided to max out as much of my deduction space as I could before hitting the AMT and “prepay” part of my obligation for 2018.

Between the charitable tax deduction and credit card churning, donating 10% of my income impacts my finances less than you’d think. For instance, for the $10,000 I’m donating in December, I get 28% back in my tax refund (more like 25-26% if you consider that I then donate 10% of my refund). I’ll also net another $2250 on credit card bonuses whose minimum spend I otherwise wouldn’t be able to reach. So, for $10,000 of charitable impact, I’m really only giving away something closer to $5250.

While I’ve considered opening a donor advised fund to manage my giving, I’ve decided against it, at least for now. The management fees are very high and I’m not really a foundation type of person; I don’t see much reason to earmark money for charitable giving long before actually donating it. Yes the money will grow sitting in the market under my control, but I’d rather a charity have money now that they can use to prioritize their needs, distribute accordingly, and have the money flow back into the economy rather than waiting for a year to donate 8% more. I might feel differently though once I start thinking about amassing a “leave a legacy” amount of money. Maybe after we pay off the mortgage.

The one benefit of DAFs I like is that it is easy to transfer equities as donations to skip the capital gains tax on those equities since technically they aren’t being sold. But I can do the same thing transferring equities as an individual to most of the organizations I donate to. Granted, it will be more paperwork.

Anyway, here are the areas I donated to in 2016 and 2017:


I don’t plan at the beginning of the year how much I’ll donate to each area, but I think this is more or less a decent reflection of my values. Note that in each category, I donated as much or more in 2017 than in 2016. So even if the % proportion is smaller in 2017, that’s just because I donated so much more in total. From the top and in clockwise order:

Brother’s Education – Because my parent’s financial situation isn’t great, most of my brother’s college expenses are covered by scholarships and grants. However, there is still a bit of a gap. Every year I send him money so that when he graduates, he can do so loan-free. While not actually “charitable giving” I count this as part of my 10% obligation per year. He will be graduating in 2018, so this portion will shift to “real” donations soon.

Political Donations – Again, not really charitable giving, but I have in the past couple years donated to candidates– all either women or minorities– who I’ve wanted to see better our government.

Disaster relief and International aid – I group these two categories together since there are a few organizations that fit both in my list, such as: American Red Cross, Oxfam, Doctors Without Borders, and UNICEF. Also on the list: Give Well, Unidos Por Puerto Rico, International Rescue Committee, and a local fire relief fund.

Immigrant / Diversity – Two big donations to CAIR.

Civil Rights – Between November last year and January, I donated a lot to the NAACP, ACLU, and SPLC.

Food Security – This is for the big name food bank in my city as well as a small, local food rescue organization that donates fruits and vegetables to seniors, people with disabilities, and other food programs. This is money I feel “proudest” to donate to each year (see: my deep emotional connection with food).

Environmental – Last year I donated to a spate of non-profit environmental litigation organizations including: National Resource Defense Council, Environmental Defense Fund, Earth Justice, and Southern Environmental Law Center. This year I’ve winnowed myself down to just the NRDC. I also donate to direct action and advocacy groups like: the Arbor Day Foundation and the Sierra Club.

Criminal Justice – This year, I solicited my fiancé’s advice for additional charities to donate to since I want this to be a family-run practice going forward. It wasn’t until he gave his suggestions that I realized I’d been really negligent on the criminal justice front. He proposed we add: our state’s bail fund, a local LGBTQ+ criminal justice advocacy group, and the Transgender Law Center specifically for their detention project work.

What is your charitable giving philosophy? Do you have a donor advised fund? How much do you donate and to what organizations?