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As an unmarried individual in the US, if already donating a significant portion of one's income to charity, is it possible to to be 'bumped' into a lower tax bracket?

For example, say I make $60k and donate $30k:

Table of income tax

The heart of this question is about earning to give annually versus at the end of one's life. I would think paying 12% vs 22% is an alarming difference when one following effective altruism is giving a portion of their income away regardless. Albeit, the Giving What We Can Pledge is only for 10% of one's income. I'm suggesting someone who gives 40-50%.

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  • You are getting into the range of numbers where some limitations can affect you. IIRC, one cannot deduct more than 50% of income as a charitable contribution. You can donate more than 50% of your income, of course, but your deduction for the donation is limited. – Dilip Sarwate Sep 26 '20 at 20:04
  • @DilipSarwate: the deduction limit used to be 50% AGI but was increased to 60% by TCJA'17. And for 2020 only CARES increases it to 100%. All of these are for cash; there are lower limits for deducting asset donations like artwork, food inventory, and conservation easements. – dave_thompson_085 Sep 27 '20 at 4:03
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Sure, it is entirely possible.

But be careful that you understand what the tax brackets mean. Assuming a single person in the table you post, they'll pay 10% on the first $9,700 of taxable income regardless of their total income ($970). They'll pay 12% on the next $29,775 (39,475 - 9,700) of taxable income ($3,573). Then they pay 22% on the next $44,725 of taxable income ($84,200 - $39,475).

If you're making $60,000 in total taxable income, you'd pay $970 + $3,573 + 0.22 * (60,000 - 44,725) = $970 + $3,573 + $3,360.50 = $7,903.50. That's an effective tax rate of 13.17% (half what you'd pay if you just multiplied 22% * your income). If you bump your taxable income down to $30,000, you'd owe $970 + 0.12 * (30,000 - 9,700) = $3,406 for an effective tax rate of 11.35%. Your $30,000 charitable contribution would save you (7,903.50 - 3,406) = $4,497.5 in taxes (15% of the contribution). That's nothing to sneeze at. But it is less than you would save if you made enough to still be in the 22% bracket after the deduction.

Of course, this ignores any potential limits on charitable contributions which may phase out at various income levels and contribution amounts. Additionally, the table is ignoring things like the standard deduction. If you have a salary of $60,000, your taxable income will be lower than that based on the standard deduction (or whatever deduction you are eligible for).

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    The first half of the computation paragraph doesn't make clear that you are using AGI not total income; further, after 0% on the first $12,200 (or itemized deductions once the OP exceeds the standard deduction), he pays 10% on the next $9,700, not 0%. If his total income is 60K, he's down around an effective rate of 10.6% with only a bit over $8000 of his income in the 22% bracket. – user4556274 Sep 26 '20 at 18:02
  • D'oh. I read the table and thought it was based on total income with 0% on the first line not AGI with a 10% marginal rate on the first line. Updated my answer. – Justin Cave Sep 26 '20 at 18:08
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Since the income doesn't increase your taxable income, what difference does it make if the rate it would have been taxed at if it were taxable was 12% or 22%? It's not taxable anyway.

What's the difference between not paying 12% of $10,000 and not paying 22% of $10,000? Either way, you're not paying any taxes on the income you donated.

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It's not very hard to figure out the answer.

If you did your owe taxes last year, change the charitable amount that gave to a higher amount and look up the bracket and the tax savings. If you used a tax filing program, it's even easier. Change input, read answer.

If you didn't do them yourself, ask your accountant to do so using say $10k increments and to indicate what your new bracket would be as well as what the tax would be at each level of donation.

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