Sunday, December 12, 2010

Year End Planning - Make $300K with Charitable Donations

Here's another short post with a financial aspect that you may want to look into before the end of the year.  Our previous tip was to give yourself an immediate raise by adjusting your withholding - the extra money can even go toward your 401K or an IRA. 

Today's tip is to take advantage of the amazing power of charitable donations to put hundreds or thousands of dollars in your pocket.  I'm primarily talking about the donation of items and goods here, rather than cash.  For those of you who may be new to a higher bracket, because of state income taxes on your income (and especially if you own a house) your are most likely going to be itemizing deductions rather than taking the standard deduction.  If you itemize deductions, you can donate goods to a charity and write off the fair market value of the goods.  For example, if you donate clothing or goods valued at $1,000, you get to deduct the $1,000 from your income (we are ignoring income phase-outs on donations that take place at higher incomes).  Assuming a combined federal and state tax rate of 40%, your donation just reduced your taxes by $400.  That is, the financial benefit of the donation effectively puts $400 in your pocket.  As you might imagine, this may be even more valuable in higher-tax states or if your federal bracket is higher. 

I previously discussed how a family could accumulate more than $300,000 for retirement by donating $3K/year of stuff and investing the monetary benefit.  Also, although $3K/year in donations seems like it is on the high side, I don't think that it is unrealistic as I will detail below.  First, please be sure to use a reasonable fair market value, as required by the tax code - don't get too aggressive.  I like to use the valuation guide put out by the Salvation Army because it has many types of items in it.  Next, realize that the bigger your household, the more you have to donate.  For example, by the time kids roll around, they are growing out of clothes and moving on to new toys all the time.  Work with them to determine which ones to donate.  Do you still fit in your suits from 5 years ago?  If not, why not donate them and thus monetize them.  How about the wife?  There is often a lot of clothing there that could be donated.

Also, for you younger lawyers, maybe it is time to bid farewell to at least a part of the comic book collection or the baseball card collection - or whatever other collection you might have.  These collectibles typically have specific price guides for valuation (such as the Wizard price guide) and you might be surprised at how high the valuations are.  Again, please be accurate and reasonable in your valuations.

Many people underestimate just how much they could donate yearly.  However, you should really think about monetizing your donations.  No only does it put money in your pocket, but you actually end up saving money because you don't buy additional things that would be needed to store the additional volume of stuff.  Also if you can find $3K to donate at the 40% tax rate, it puts $1,200 in your pocket - the same amount that would go in your pocket from a $2,000 bonus - that's pretty significant.  Stop leaving this extra "bonus" on the table.

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