Why You Should Put Off Year-End Charitable Contributions

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We’re getting close to the end of the year and as everyone does their year end tax planning, it’s important to remember that not all “last minute tax tips” work for everyone. It’s important to analyze your particular tax situation before blindly following these ideas – RJ Weiss shares with us why you might want to wait until January 1st, 2011 to make those charitable donations.

Now that December is here, prepare yourself for Christmas music, crowded malls, and of course, the hundreds of personal finance articles about “Year-End Tax Planning.”

Many of these articles do serve a purpose. However, the majority, do more harm than good.

A common topic among articles about year-end tax planning is the deduction of charitable contributions. What many taxpayers don’t understand is that charitable contributions are only deductible if you itemize your deductions, which only makes sense for about 25% of taxpayers.

The purpose of this article is to discuss how you still might be able to benefit from charitable contributions, even if you don’t plan on itemizing this year. In order to do that, let’s review what deductions are.

Tax Deductions

A deduction reduces the amount of income you’re taxed on. The greater your deductions, the lower your taxable income.

There are two deduction categories, standard and itemized. With very few exceptions, you’re allowed to take one or the other when filing your taxes for the previous year.

The standard deduction is a flat amount that you’re allowed to deduct based on your filing status. For 2010, the standard deduction for a single is $5,700 and $11,400 for a married couple filing jointly.

Itemized deductions are a variable amount that you’re allowed to deduct from your income. This amount is based off of your expenses during the year that qualify as itemized deductions.

Taxpayers that choose to itemize, due to the amount of their itemized deductions being greater than the standard deduction, include:

  • The Homeowner – Mortgage interest, property taxes, and PMI are all itemized deductions.
  • The Sick – If you spend over 7.5% of your income on medical care, your costs can be itemized.
  • The Charitable – Charitable contributions to a qualified charity, can be itemized.

Click the following for more on itemizing.

Thinking Ahead

Next time you come across an article about year-end tax planning moves, it’s important not only to think back about what deduction you plan to take this year, but think ahead as to what deduction you plan to take next year.

For example, in 2009 I became a homeowner. Up until that point, I had always taken the standard deduction. However, now as a homeowner paying mortgage interest and property taxes, my itemized deductions were greater than the standard deduction.

Looking back, I made a few charitable contributions in December 2008, even though I knew I wasn’t going to itemized deductions that year. If I delayed those gifts just a few more days until January 1, 2009, I could have deducted those gifts in 2009.

For those of you thinking about making a year-end donation, I applaud your generosity. However, before you blindly accept the advice that making charitable contributions is a good tax move, think ahead to what deduction you plan to take this year and next year.

If you’re more likely to use the standard deduction again on your 2010 taxes, wait until January 1, 2011 to make your charitable gifts. Doing this increases your chances of you being able to deduct your charitable gifts.

This is a guest post from RJ Weiss. RJ is an aspiring financial planner, who writes about financial planning for a small community of young adults, at Gen Y Wealth.

{ 12 comments, please add your thoughts now! }

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12 Responses to “Why You Should Put Off Year-End Charitable Contributions”

  1. cubiclegeoff says:

    And if your big reason is to get the most bang for your buck, think about your income levels. For example, my wife was out on maternity leave for 6 months of the year, so our income this year is significantly lower than it will be next year, when we’ll probably be in a higher tax bracket.

  2. Matt K says:

    and always check who you’re giving to. if you’re concerned about bang for the buck yourself, you should also be concerned about bang for the buck once the money goes to the charity you choose.

  3. zapeta says:

    I never have enough deductions to itemize, so my charitable donations don’t provide me any tax benefits. Still, you make a good point about thinking about your situation before donating.

  4. Chuck says:

    You could contribute enough to a donor advised fund in order to get tax benefit, and then do all your charitable giving from that fund for a few years, then repeat.

  5. I just wrote on our charity work today …. we increased our donations significantly this year and plan to donate about the same next year too. Here in Canada you can also choose to carry forward donations to future taxable years. We simply think that this is the time of year people are in great needs so it is a good time to donate.

    • RJ Weiss says:

      I didn’t realize that in Canada you can have carry over donations. That’s a pretty nice tax benefit, which I’m sure can help a lot of people out.

  6. Jen W says:

    I don’t own a home, so about the only potential deductions I have are for charitable donations and potentially state income tax. By itself, the state income tax is less than the standard deduction. What I do is shift my charitable donations so that I make the donations for 2 years in the same calendar year. For example, I will make contributions for 2010 in January of 2011 and the contribution for 2011 in December of 2011. The total of the contributions of 2 years plus state income tax deduction allows me to get well above the standard deduction. On the off years (in this example, 2010 and 2012), I just take the standard deduction.

  7. Does anyone know at what point ($-wise) donations become worth itemizing? $200? $500?

    • eric says:

      I think that totally depends on what else you have to itemize. If the total amount is more than your standard deduction, then it makes sense to itemize.

    • govenar says:

      The standard deduction in 2010 is $5,700 for an individual; if you don’t have many other deductions, you’d have to donate a lot more than $500 before you’d benefit from itemizing deductions. If you have high state income tax though, that by itself could be enough.

  8. Mike says:

    For those fortunate enough to have paid off their mortgage and unable to itemize because property taxes in themselves are insufficient to exceed the standard deduction threshhold you may want to consider bundling your property taxes into one year. For example, to itemize in 2010 you would pay your 2009 second half of the year taxes late so they are paid in 2010. Pay your 2010 taxes on time. Then Iay the 2011 first half taxes early, also in 2010 which then provides 2 years of property taxes in one year allowing itemization every other year (2010, 2012, 2014,…). You can then adjust your charitable contributions per previous comments to pay 2 years worth in the year you itemize. You also can adjust your state withholding to pay more in the year you itemize. This is the basic idea, you will need to look at your own situation and take into account things like the late charge for late property taxes to see what makes sense for your situation.

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