‹ View All Insights

Should You Maximize Your Charitable Donation This Year?

Published by Motley Fool Wealth Management on Wed, Nov 17, 2021
.Should You Maximize Your Charitable Donation This Year?

The CARES Act allows individuals to take up to a 100% deduction against their adjusted gross income (AGI) for a cash charitable contribution just for 2021. In other words, individuals could theoretically use philanthropic gifts to wipe out their tax liability this year. Sounds like an opportunity that you might want to jump on…right? Not so fast.

Tax planning is based on two broad principles.

There are two sides to the tax equation—income and deductions.

  1. Getting a tax bargain on the income. Recognize income as efficiently as possible by doing so at the lowest rate possible.
  2. Getting “bang for your buck” through deductions. Recognize deductions at the highest rate possible. That’s the reason charitable giving generally increases in high-income years.

Giving a cash contribution to match 100% of AGI may not always make sense.

The CARES Act provision caught the eye of many taxpayers. But is it worth it from a financial perspective? Maybe not. The reason may lie in the benefit received for every dollar contributed.

For example, federal plus state tax rates can be upwards of 50% at the highest tax bracket in 2021. That means every dollar contributed to a charity would have a $0.50 tax benefit. Some may consider that a great deal.

Conversely, the effective tax rate at the lowest bracket is roughly 10% (depending on state taxes). Thus, when cash contributions reduce AGI to fall within the lowest tax bracket, taxpayers receive far less for their donation compared to higher tax brackets. In other words, instead of receiving $0.50 for every dollar contributed, now they’re only getting a $ 0.10 tax benefit.

Let’s walk through an example.

Sam and Veronica expect to earn a combined $350,000 in 2021. They wish to contribute 100% of their income in 2021 to charity, so they don’t have to pay taxes this year. But since they are increasing their donation this year, they do not expect to make any charitable contributions next year, in 2022.

Their Wealth Advisor analyzed two potential scenarios: 100% charitable contribution this year versus splitting their contribution over two years.

email-chart-charitableThis example illustrates the importance of timing. By employing an all-in approach (Scenario 1) where the charitable contribution was made in a single year, Sam and Veronica—despite paying zero taxes in year 1—paid a higher effective tax rate over two years compared to Scenario 2. As a result, they did not maximize their potential deduction value.

Alternatively, by splitting their gift over two years (Scenario 2), they could take full advantage of their benefit and realize an effective tax rate that was less than half of the all-in approach of Scenario 1.

In the end, Sam and Veronica elected Scenario 2. It was a win-win for the charity (which still received an aggregate $350,000) and the couple, as they maximized their charitable benefit by lowering their overall taxes over a two-year period.

Consider the whole picture.

This CARES Act provision encourages donors to give generous gifts this year—an admirable push to help the disadvantaged and reward givers. But the incentive can be short-sighted.

Instead of falling for an attention-grabbing headline, look at the whole picture. For some, that may mean that consolidating philanthropy in one year may not be the best option. Instead, it may make sense to spread it over several years.


The content in this article is provided for informational purposes only, reflects our general views on investing, and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals, including (without limitation) tax professionals, regarding all personal finance issues.

Access to Motley Fool Wealth Management (“MFWM”) is only available to clients pursuant to an Investment Advisory Agreement and acceptance of MFWM's Client Relationship Summary (PDF) and Brochure (PDF - 204 KB). You are encouraged to read these documents carefully. All investments involve risk and may lose money. MFWM does not guarantee the results of any of its advice or account management. Clients should be aware that their individual account results may not exactly match the performance of any of our Model Portfolios. Past performance is no guarantee of future results. Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. MFWM retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.

During discussions with our Wealth Advisors, they may provide advice with respect to 401(k) rollovers into accounts that are managed by MFWM. Such recommendations pose potential conflicts of interest in that rolling retirement savings into a MFWM managed account will generate ongoing asset-based fees for MFWM that it would not otherwise receive.

While we can counsel on tax efficiency and general tax considerations, MFWM does not (and is not permitted to) provide tax or legal advice. Clients who need such advice should consult tax and legal professionals. These comments may not be relied upon as personalized financial planning or tax advice.

MFMW, an affiliate of The Motley Fool LLC (“TMF”), is a separate legal entity, and all financial planning advice and discretionary asset management services for our clients are made independently by the financial planners and asset managers at MFWM. Neither of TMF co-founders, Tom Gardner and David Gardner, nor any other TMF analyst is involved in the investment decision-making or daily operations of MFWM. MFWM does not attempt to track any TMF services.