I’ve decided to give a little more than double what I normally give to charity this year, and skip giving next year. I see many reasons to give a larger-than-normal gift this year, and no countervailing reasons. If it weren’t for some idiosyncratic factors in my situation, I would roll my next three years of giving into this year’s gift.
I decided to write up my reasoning in the hopes of prompting others to consider whether they should be doing similarly. That said, everyone’s financial situation is different, and it may be a good idea to consult with a tax lawyer for personalized advice.
Tax policy
The issue that originally prompted me to consider a larger-than-usual gift was the prospect of changing tax policy due to the new administration, which could result in lower tax benefits for charitable giving in 2017 vs. 2016. A quick summary of my thinking follows; this should not be taken as tax advice, merely as my own personal guesswork and reasoning behind my own giving.
President-elect Trump’s public tax plan has three important features that could affect tax benefits for charitable giving:
- Reducing tax rates “across-the-board.”* The proposal looks similar in this respect to the 2016 House Republican Tax Reform Plan. Depending on one’s tax bracket, this could mean that the benefit for charitable giving falls by a few percentage points, so giving this year could save more money on taxes than giving next year.
- Raising the standard deduction significantly (more than doubling it). The proposal looks similar in this respect to the 2016 House Republican Tax Reform Plan. Charitable deductions are only beneficial insofar as total itemized deductions exceed the standard deduction; depending on how else treatment of itemized deductions changes, and on a taxpayer’s specific situation, this could reduce the amount of charitable giving that is effectively deductible by several thousand dollars per year, or not at all. It could also strengthen the case for giving less frequently than once per year.
- Capping total itemized deductions at $100k for singles/$200k for couples. If this happened as stated, it could effectively eliminate the tax benefit of charitable giving for many people (most of them earning very high amounts, giving very high amounts, or both). The 2016 House Republican Tax Reform Plan does not have a similar provision, and I consider this change less likely than the above two.
Giving opportunities
GiveWell’s top charities look strong this year and have very large amounts of room for more funding. It’s reasonably likely that this will be true again in the next few years, but I don’t know that it will be, and it’s hard to imagine the giving opportunities on this front getting much better in the near term.
I also see a fair amount of appeal in the option I mentioned in the staff personal giving post:
I thought about reallocating my giving to another individual, someone who is quite value-aligned with me and quite knowledgeable, and thinks differently enough that they might see opportunities I don’t.
Right now, I can think of more than one individual in this category, and some of the giving opportunities they’re interested in are not a fit for Good Ventures. In future years, I hope that the Open Philanthropy Project makes connections with more donors and effective philanthropy rises generally, and this could mean that more money flows to opportunities in this category (opportunities that I don’t see and/or that aren’t a good fit for Good Ventures). This is another case where it seems like giving opportunities may get weaker, but are unlikely to get stronger.
What I’m doing
I’m planning to give an amount equivalent to my next two years’ worth of charitable giving, taking the likely trajectory of my salary into account. If not for some idiosyncratic aspects of my situation, I would have gone with three years. I don’t want to plan beyond three years because I think there are a lot of difficult-to-anticipate changes that could take place in that time.
Note that there are limits on the total proportion of income that can be deducted in a year, and one should check these before deciding to make a multi-year gift this year.
* Though as written, the tax plan would appear to constitute a major tax increase for many single filers, based on this statement: “Brackets for single filers are ½ of these amounts.” I’ve chosen not to focus on this issue, partly because there is no similar change in the 2016 House Republican Tax Reform Plan.
Comments
Interesting article, been thinking about this recently. Really just starting my career starting next year– wondering if it would be reasonable and effective to alternate years of giving for tax efficiency. Or if the benefit of giving now , or the habit of giving now, could support the simple method of just giving as I go along.
Thanks for writing this.
I think this post would be more useful to readers if it included a little more quantitative context on the income level and donation amounts that you were considering. As your income is at the ~95th percentile of US individual income (cf. https://en.wikipedia.org/wiki/Personal_income_in_the_United_States#Income_distribution) it’s not clear to me how broadly applicable the tax considerations and concerns you list would be.
I’m also concerned that sentences like this don’t provide adequate context about the income level at which it makes sense to pay (often hefty) lawyer fees, and might either make your post appear to cater to an extremely wealthy userbase or lead people with much lower incomes to perceive their tax/donation situation as more complex than it actually is. “That said, everyone’s financial situation is different, and it may be a good idea to consult with a tax lawyer for personalized advice.”
For people interested in understanding the math of donation bunching, I’d recommend reading Ben Kuhn’s post http://www.benkuhn.net/bunching (there may be other similar expositions I am missing).
Thanks for writing this. Have you heard or thought about how AMT could enter into this analysis?
Hi Holden. Do AMF, SCI, and GiveDirectly prefer to receive (say) a year’s donations in one lump at the start of the year, or as regular donations (e.g. weekly/monthly)? I know charities like the stability of recurring donations, but having all the money from day makes things even more certain for that year. On the other hand it might make it harder for them to forecast donations and plan for the following year…
This would affect how I time my donations. Sorry if you’ve blogged about this already.
Thanks!
Sally
Vipul, thanks for the thoughts. I think I gave enough info to prompt people to consider these issues and to get them started on whether it makes sense for them to look into a lawyer, consider front-loading, etc. I didn’t want to get into the details of my personal financial situation or to provide anything that looked like customized advice for others.
Ian, I haven’t put any thought into how the AMT might affect things.
Sally, I think it might be useful to be explicit with GiveWell or with the charity that you’re front-loading (eg via a note); if enough people do this, it might affect their planning. That said, we usually communicate to our top charities that they shouldn’t think of GiveWell-influenced donations as recurring revenue, since we revisit our recommendations every year.
Food for thought. Thank you. I’m very likely to abandon my current high-paying job for a more moderate-paying job mid-next year, putting me in a lower tax bracket next year even if tax brackets stay the way they are. I had not considered the impact on that on the effective value of charitable donations and the opportunity for front-loading, so thanks again for bringing that up.
(Apologies if this is a double post; I tried to post this twice yesterday, but it never appeared. Maybe because i had a link in it? I’ve removed the link to see if that helps.)
Ian: on AMT, yes this is a consideration, and it’s quite complicated. Charitable deductions are among the few deductions that are still available if you fall under the AMT regime, but your marginal tax rate under the AMT can be either 28% or 35% depending on your income level. (Utterly befuddlingly, it starts at 28%, then jumps to 35%, then drops to 28% again. (For some detail on this, Google Forbes, “alternative minimum tax sweet spot.”) If you’re subject to AMT, you’re likely in the 33% federal tax bracket, so your AMT marginal tax rate can be higher or lower than your regular federal marginal tax rate, depending on whether you happen to be in the 35% range or in one of the 28% ranges.
– If you’re in the 35% range this year and expect to move to one of the 28% ranges next year (either by earning more or by earning less), it’s worth front-loading your donations.
– If you’re in one of the 28% ranges now and expect to move to the 35% range next year, or to drop out of the AMT requirement entirely and be subject to the federal 33% marginal tax rate, you’re better off deferring donations to next year.
In reality it’s even more complicated than this, because your income for AMT purposes depends on how much you are paying in state and local taxes as well. (You deduct them when computing federal taxes, then add them back for AMT purposes.) So in short: it depends, and it’s complicated.
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