By Joel Chouinard, ChFC®
December 16th, 2024
As a big law attorney, do you ever feel like you could make a bigger difference in your community? But maybe you don’t have the time or energy to volunteer on the weekend. Or maybe your pro-bono work is taking too much time away from billable hours. Here's something you might not know: as a big law attorney, you have a unique opportunity to make an impact through charitable giving while reducing your tax bill. By strategically planning charitable contributions, you can maximize your tax deductions and potentially increase the amount you donate to your favorite organizations. Let’s explore how to make charitable giving go further with tax-smart strategies.
Why Tax-Smart Giving Matters
In the financial planning industry, we have this saying that investors shouldn’t “let the tax tail wag the dog.” In other words, saving on taxes should not be the primary factor for any investment opportunity. This includes charitable giving. That said, the tax code is built to incentivize people to donate and help out their community. Therefore, if you are charitably inclined, it’s important to understand the tax savings opportunities. But first, let’s discuss how deductions work.
Understanding charitable tax deductions
When you donate money (or an asset like a car or painting), you get a tax deduction. A tax deduction simply reduces the amount of money that should have been subject to taxes. For example, if you make $500K per year, and you donate $25K, you only get taxed as if you are making $475K. Deductions are especially powerful for individuals in the higher tax brackets. In our example above, a cash donation of $25K for someone in the 32% tax bracket would save them roughly $8,000 in taxes, making their net out-of-pocket outflow only $17K ($25,000 donation minus the $8,000 tax saving). That said, charitable contribution deductions are only available to those who itemize their deductions on their tax return.
Standard deduction versus itemizing your deductions
The standard deduction is a dollar amount set by the IRS each year that allows taxpayers to reduce their taxable income regardless of whether they actually have deductions. For 2024, the standard deduction is $14,600 for single taxpayers and $29,200 for married taxpayers filing jointly. This means that unless you have tax deductions exceeding those thresholds, you are better off using the standard deduction.
If all of your allowable deductions exceed the standard deduction (charitable contributions being one of them), then you get to write off the larger amount on your tax return (known as itemizing). Therefore, if you are well below the standard deduction threshold, just be aware that your charitable donations likely won’t reduce your tax bill. However, for those of you who typically itemize deductions, your donations will have direct tax savings.
Charitable Giving Strategies for Attorneys
The IRS allows taxpayers to donate more than just cash. In fact, you can donate pretty much any piece of personal property, from cars to paintings to used clothes. Here’s a list of items that you can donate. However, each type of donation (e.g., cash, personal property, securities, etc.) has different deductibility rules, so it’s important to understand how much of your donation will actually impact your tax bill. Below are some strategies that attorneys can use to maximize their gifting while minimizing their tax burden:
Bunch Your Charitable Contributions
If you’re looking for a simple charitable giving strategy, try bunching your donations. Bunching is a tax strategy where you cluster your charitable donations into a single year rather than spreading them out over multiple years. This allows you to exceed the standard deduction threshold and itemize your deductions in that year, potentially leading to significant tax savings. In the following years, you would take the standard deduction, effectively maximizing your deductions over time.
For example, let's say you typically donate $5,000 to charity each year, but your total deductions always fall short of the standard deduction for your filing status. By bunching your donations, you could donate $10,000 in one year, pushing you above the standard deduction threshold and allowing you to itemize your deduction. In the following year, you wouldn't make any charitable contributions and would take the standard deduction. This strategy allows you to get a tax benefit for your charitable giving every other year, rather than having your donations consistently fall below the standard deduction threshold. It’s a great strategy for big law attorneys who expect a large year-end bonus.
Establish a Donor-Advised Fund
If you like donating to your favorite charity each year, but you’re worried that your cash flow might look different from year to year, a Donor Advised Fund (DAF) might be a good option for you. A DAF is a charitable investment account where you can contribute money (or securities), receive an immediate tax deduction, grow your funds tax-free, and then direct grants to your favorite charities over time. It offers flexibility, allowing you to support multiple charities at your own pace while using compound growth to leverage your dollars even more. DAFs are especially beneficial for those who expect a large financial windfall (e.g., year-end big law bonus) and want to get immediate tax savings but want to spread out their donations over time.
Donate Appreciated Securities
If you own highly appreciated securities, and you don’t want to sell them and incur taxable gains, you can instead donate your shares to your favorite charity. Now, because these aren’t cash donations, the deductions are treated differently. When you donate appreciated securities (like stocks or bonds) that you've held for more than one year, you can generally deduct the full fair market value of the asset at the time of the donation. This means you avoid paying capital gains taxes on the appreciation, and the charity receives the full value of the asset. However, there are limitations on how much you can deduct, typically limited to 30% of your adjusted gross income. If you don’t want to make one big charitable contribution but rather spread out the donations over a few years, you can fund a DAF using those securities. You can sell the appreciated securities inside the DAF and reinvest the proceeds in a diversified portfolio to grow the funds over time. The embedded capital gains will magically disappear.
Final Note
As I mentioned, tax savings should not be the primary factor for charitable giving, so it’s okay to help out your community even if you don’t get a tax break. As an alternative to donating money, consider donating your time by volunteering instead. As an attorney, you also have the opportunity to give your time through pro-bono work. This can have an even bigger impact than donating money and can still fulfill your philanthropic goals. Of course, if you have the time and means, you can do both!
SharpEdge Financial LLC is a registered investment adviser registered with the State of Texas. Registration does not imply a certain level of skill or training. The views and opinions expressed are as of the date of publication and are subject to change. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. When specific investments or types of investments are mentioned, such mention is not intended to be a recommendation or endorsement to buy or sell the specific investment. The author of this publication may hold positions in investments or types of investments mentioned. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.