Don’t forget this 'charitable' way to decrease your tax bill

For many physicians, philanthropy and charitable giving are a key part of who they are. Whether it’s tithing at their church, cash gifts to their alma mater, or donations to impactful organizations with missions they hold dear, doctors are known to be quite generous, giving to others on a consistent basis. 

If this sounds like you, it’s good to know that the government will reward you for this type of behavior in the form of tax breaks.

So, let’s talk about best practices.

Make sure your donation is tax deductible

In order for your generosity to be rewarded, it must meet certain qualifications. Three of the main qualifications include:

1. It must be a donation to a charitable organization (not a for-profit business or an individual person)

2. You cannot have received anything in return (buying items from school fundraisers or tickets to fancy charity galas do not count)

3. You should be able to provide proof of the donation (a receipt or yearly statement from the organization will suffice)

If your generosity meets these three qualifications, then it’s likely tax deductible. Let me give you an example: Let’s say you have a taxable income of $100,000 in the year with an effective tax rate of 20%. In this case, you would pay approximately $20,000 in taxes ($100K x 0.20 = $20,000). However, if you made a tax-deductible donation of $10,000, then your taxable income of $100,000 would be reduced to $90,000 and you would now pay 20% in taxes on $90,000 ($90K x 0.20 = $18,000). 

As you can see, your tax-deductible donation of $10,000 lowered your tax bill by $2,000.

Just remember—the amount of money you save with each donation depends on your individual tax rate.

Reconsider the timing 

As of 2024, in order for your giving to be tax deductible you must file your taxes a certain way. When you fill out the tax forms (or your accountant does so on your behalf) you must decide between taking the standard deduction or itemizing your taxes. 

One way to fix this dilemma is to reconsider when you give the money. Most people give on a fairly regular basis (once a month, once a year, and so on). Changing this practice may be the fix you need. If you switch from giving smaller donations once a year and instead give larger donations every two (or more) years, you might cross the threshold (in the year you give) to be able to itemize your taxes and save more money each year. 

Here’s an example: Let’s say you are married with a household taxable income of $200,000, and each year you plan to donate 5% ($10,000) of your income to the charity of your choice. For the sake of this example, let’s also say that you do not own a home and have no other tax deductions aside from the amount you pay in state taxes (approximately $10,000 a year). In this case, your family may actually save more money by taking the standard deduction instead of itemizing your taxes. Itemizing your taxes will reduce your federal taxable income by around $20,000 when you factor in state tax payments ($10,000) and the donation amount ($10,000). 

If you instead gave that $10,000 every other year (which equates to $20,000 every 2 years), then that $20,000 combined with the $10,000 in state taxes equals $30,000. This nets you higher savings than the standard deduction of around $27,000. In reality, most doctors have high enough incomes, pay enough in mortgage interest, and owe enough in state taxes that they likely itemize their taxes anyway.

Consider giving stock instead of cash 

An alternative to cash is donating stock—something that is accessible and feasible for many doctors. While donating investments in retirement accounts may not be the most money-savvy option, given potential tax penalties, you can consider donating appreciated shares held in taxable brokerage accounts.

Let me give you an example: Let’s say you make $150,000 in taxable income, and you plan to donate 10% of this amount ($15,000) to your local church in the form of a tithe. Let’s also say that, years ago, you purchased 100 shares of Amazon.com when it was priced at $50 per share. While you paid a total of $5,000 initially, the stock price has risen and your investment is now valued at $15,000.

You have a couple options—you could give your church the $15,000 in cash, or you could donate the appreciated Amazon shares. The latter may be a more tax-savvy option—it means you aren’t paying $15,000 directly from your own pocket, and it costs you less money overall.

Utilize donor-advised funds 

Some doctors dream about starting a nonprofit or charitable foundation of their own in the future. Some don’t feel their donation is significant enough to make an impact. Other people would prefer to give anonymously. A solution for these issues is to take advantage of a donor-advised fund (DAF). 

A DAF is like an investment account that is used specifically for charitable giving. You can call a brokerage firm, such as Vanguard or Fidelity, and open a DAF. The money in this account can either sit as cash or be invested—in bonds, mutual funds, or things like real estate and cryptocurrency. You can then donate the money (or the investments) to the organization(s) of your choosing, whenever you want and as often as you want. 

The benefits of a DAF include the ability to donate anonymously, track your donations, and allow for investing opportunities that can increase how much money you have available to donate.  

You can deduct any money you put into a DAF on your taxes the year you transfer the funds, even if you haven’t actually donated the money to charity yet. 

A potential downside of a DAF is that, once you have transferred funds into the account, it has to eventually be donated to charity—you won't be able to withdraw funds for personal use.

Be advised that some brokerage firms have minimum transfer amounts (eg, Vanguard’s minimum is $25,000, but Fidelity does not have a minimum requirement). 

Charitable contributions in retirement

Some people consider taking a qualified charitable distribution. This allows them to withdraw money from a retirement account (such as a 401k, 403b, or similar) tax free to donate to charity. This way, they can reduce their taxes while donating money from investments. It also allows them to withdraw the annual amount required after reaching retirement age.

One type is a charitable remainder trust. This is often used by people who want the vast majority of their net worth to go to charity, but still need income to live off of or to give to their loved ones. This type of trust allows you, the beneficiary, to donate some or all your assets to a charity. The charity then pays you (or the person you choose) a set amount of money each month until you pass away. 

After you pass away, what is left goes directly to the charity. You get a tax deduction for setting up this trust, with the amount you deduct depending on the funds in the account and your monthly distribution payed to you from the charity.