Found Monies
Found Monies
Last year, for those who had Individual Retirement Accounts (IRA) made with tax exempt dollars, or some other retirement savings vehicle, we suggested that you consider using your IRA to make your tithe to the church. Why? Well, if you were ready to withdraw a portion of your IRA, you must take a Required Minimum Distribution (RMD) to avoid a tax penalty. All income received would be considered part of your gross income in the year withdrawn. If you had your “tithe” sent directly from the IRA administrator to LGMC, your gross income is reduced. Therefore, you would automatically have less monies in your highest tax bracket. This effectively means that your gross income would be lower and the new standard deductions would have a larger impact on your taxes.
But, not everyone can redirect their savings directly to LGMC. As an example, if you have an annuity contract, your administrator may not permit you to have a “tithe” sent to LGMC, instead forcing you to receive it directly as additional taxable income. You may also be too young to make IRA withdrawals, or not have an IRA at all.
The latest income tax changes have given some an opportunity to save monies, not merely by different brackets, but in how you lump deductions each year. This is predicated upon the current tax rates which go from 2019 through the year 2025. The limit on charitable deductions is set at 50% of adjusted gross income.
You are not required to have IRAs and their RMDs for the following to be effective. You could use both techniques if they fit your circumstances. So, please, read through the remainder of this article.
Shown below are examples for single taxpayers, heads of households, and married filing jointly. You might be surprised as to how you might save on taxes.
Single Taxpayer: An example would be for single taxpayers with adjusted gross income of $38,701 to $82,500. The marginal tax rate is 22%. The standard deduction is now $12,000, with $1,600 added if you are over 65 years of age. This would mean that you could deduct $13,600 from your gross income and pay taxes on the balance. Now, your income would include such items as Social Security, retirement payments, and Required Minimum Distributions or actual IRA distributions.
If in 2019 you received $18,000 from Social Security, $20,000 from a retirement program, and $12,000 from an IRA distribution, your gross would be $50,000 per year. You have a choice of taking the $13,600 in standard and over 65 years of age deductions, leaving $36,400 in adjusted gross taxable income. You now pay 10% of the first $9,525 ($952.50) and 12% of the remaining $26,875 ($3,222.84), for a total of $4,175.34 in total taxes.
Alternatively, in 2019 you could have attempted to see if you had more than $13,600 in itemized deductions. If you had a $1,000 property tax bill, $3,000 in mortgage interest, Fl sales taxes of $1,050 (you are still permitted to deduct sales taxes as you have no FL income taxes – $15,000 in taxable purchases times 7%), and $6,000 ($500 per month) in tithes to LGMC, your total would still be $11,050, less than the standard and over 65 years of age deduction. You would save no taxes by itemizing.
But, if you had sufficient savings to make your 2020 tithe of $6,000 in December of 2019, your total itemized deductions would be $17,050, which would reduce your $50,000 gross income to $32,950 adjusted gross income. Your taxes would be $952.50 + $2,811 for a total of $3,763.50.
Your total tax savings would be $411.84 and you don’t make tithes to LGMC during 2020 as you made your contribution during 2019.
Now, in 2020 you don’t itemize and merely claim the standard and over 65 deduction of $13,600.
Head of Household:
If in 2019 you received $18,000 from Social Security, $20,000 from a retirement program, and $12,000 from an IRA distribution, your gross would be $50,000 per year. You have a choice of taking the $13,600 in standard and over 65 years of age deductions, leaving $36,400 in adjusted gross taxable income. You now pay 10% of the first $13,600 ($1,360) and 12% of the remaining $22,800 ($2,736), for a total of $4,096 in total taxes.
Like the example for a single taxpayer with the same itemizations, your $11,050 in deductions would still be less than the $13,600 in standard deductions. Therefore, you either take the standard deduction OR increase you charitable contributions for 2019 to go over $13,600 (pre-pay your 2020 tithe), increasing your 2019 deductions, stop tithing in 2020 the amount you pre-paid, and take the standard deduction at the end of the year.
Joint Returns:
Now, look at a couple who both worked during their careers. They each have a retirement account, IRA’s, and possibly Social Security. Since they have a higher retirement income, and marginal tax rates increase as gross income rises, the benefits of paying two tithes in one year and skipping one year may make even more sense from a tax savings perspective.
Consider a couple filing jointly using a standard deduction. They have retirement accounts of $80,000 per year, Social Security of $24,000 per year, and required minimum distributions of $12,000. Their total income is $116,000 per year. They may take a $24,000 standard deduction plus an over 65 deduction of $2,600. Therefore, their $116,000 income is reduced by $26,600, leaving then with an adjusted gross income of $89,400. Their taxes are 10% of the first $19,050, 12% of the next $58,350, and 22% of the remaining $12,000. Therefore, taxes are $1,905 + $7.002 + $2,640, totaling $11,547.
Now, if they itemized and made two years tithes during one tax year, the figures might look significantly different. If they had a $2,000 property tax bill, $3,000 in mortgage interest, Fl sales taxes of $2,100 (we are still permitted to deduct sales taxes as we have no FL income taxes – $30,000 in taxable purchases times 7%), and $12,000 ($1,000 per month) in tithes to LGMC, their total would still be $19,100, less than the standard and over 65 years of age deduction $26,600.
Now, consider what would happen if they paid two tithes during 2019, none in 2020, and again paid two tithes during 2021. In itemizing in 2019, they would have the original $19,100 of deductions plus an additional prepayment of their 2020 tithe in December of 2019, making their new total itemized deductions $31,100 ($19,100 + $12,000). . Their taxes are 10% of the first $19,050, 12% of the next $58,350, and 22% of the remaining $7,499. Therefore, taxes are $1,905 + $7,002 + $1,650, totaling $10,557, or a savings $990.
Joint Return – high earner:
Assume a combined income from all sources of $180,000 (retirement + Social Security + an IRA’s Required Minimum Distribution). Using the standard deduction of $24,000 + their over 65 adjustment of $2,600, their income would drop to . Their income taxes would be $1,905 (10% for the first $19,050) + $7,002 (12% of $58,350) + $16,764 (22% of the remaining $76,200), for a total income tax of $25,671.
If they itemized with a single year’s tithes paid in one year, their taxes may look different. If they had a $2,800 property tax bill, no mortgage interest, Fl sales taxes of $3,300, and $18,000 ($1,500 per month) in tithes to LGMC, their total would be $24,100, less than the standard and over 65 years of age deduction of $26,600. They are better off taking the standard + over 65 deduction.
But, if they prepaid their 2020 tithes in 2019, they would add another $18,000 to their deductions, making it $42,100 in deductions. Their adjusted gross income would now be $137,900. Their income taxes would be $1,905 (10% for the first $19,050) + $7,002 (12% of $58,350) + $13,310 (22% of the remaining $60,500), for a total income tax of $22,271. At this point, their taxes would be $3,454 less in 2019 if they pre-paid the 2020 tithe. While not paying the tithe each week during 2020, they should be putting an equivalent amount aside in savings.
Our first example would follow these rules for alternating pre-pay the first year and standard deductions the second year.
2019 (contribute weekly and pre-pay 2020 tithe). Take itemized deductions for 2019
2020 (no weekly contributions but put aside in savings for doubling up in Dec 2021). Take standard deductions for 2020
2021 (contribute weekly and pre-pay 2022 tithe from 2020 savings account). Take itemized deductions for 2021
2022 (no weekly contributions but put aside in savings for doubling up in Dec 2023). Take standard deductions for 2022
Each of these suggestions are predicated upon two items:
- The ability to pre-pay a tithe (double-up) in one year.
- Plugging in your own itemized deductions to see how they would affect similar computations
For the super saver, there is another option. Since the 22% bracket still has $60,500 being taxed, what would happen if prepayments were made for 2020 at $18, 000, and 2021, 2022, and 2023 each at $20,000? Taxes would be $1,905 (10% for the first $19,050) + $7,002 (12% of $58,350) + $110 (22% of the remaining $500), for a total tax bill of $7,307. Note that the previous taxes were $25,671 versus $7,307 which equates to a $18,364 savings over the four years.
The above included a $2,800 property tax bill, no mortgage interest, and Fl sales taxes of $3,300, for a total of $5,100 in deductions. Taking this away from the $180,000 total income, we have an adjusted gross income (AGI) of $174,900. Using the 50 % limit on charitable deductions against AGI, we could not exceed $87,450 in charitable deductions. Since we are aggregating our $78,000 in tithes for four years, we still have $9,450 not affected by our 50% limitation. Therefore, we could donate another $9,735 if we so desired, but, we would then be saving only 12% on this amount, not 22%.
With two more years under this tax table (2024-2025), it would be possible to do this again in 2024 by doubling up on contributions and then taking the standard deduction during 2025.
While not possible for many, a few might have savings which permit them to benefit from this legal action. In our examples, the savings may not seem significant, but they would be real. What you do with those savings is what is important. It is truly “Found Monies”. The savings could always be added to the contribution to LGMC, which would actually further lower your taxes each year you pre-pay your tithe.
