How to Deduct your Tithing Dollars
Utah is home to a significant number of members of The Church of Jesus Christ of Latter-day Saints (LDS Church), many of whom contribute 10% of their income as tithing. While this practice is an important aspect of their faith, many Utah residents are not receiving the full potential tax deduction for their charitable contributions because they do not meet the itemizing threshold under current tax laws. However, by employing a strategy known as deduction lumping, Utah residents can maximize their tax benefits. This article explores how tithing can be strategically paid to achieve greater tax savings.
Understanding Deduction Lumping
Deduction lumping, or bunching, involves combining deductible expenses into a single tax year to exceed the standard deduction threshold, allowing taxpayers to itemize deductions and reduce taxable income more effectively. By alternating between lumping deductions and taking the standard deduction in different years, taxpayers can optimize their overall tax situation.
The Standard Deduction vs. Itemized Deductions
Under the Tax Cuts and Jobs Act (TCJA) of 2017, the standard deduction was significantly increased, making it more challenging for many taxpayers to benefit from itemizing. As of 2023, the standard deduction amounts are:
$13,850 for single filers
$27,700 for married couples filing jointly
For many Utah families who tithe, their annual charitable contributions, along with other potential deductions like mortgage interest and state/local taxes, may fall short of these thresholds. This is where deduction lumping becomes advantageous.
How Deduction Lumping Works for Tithing
By paying two years of tithing in one calendar year, Utah residents can potentially surpass the standard deduction threshold and itemize their deductions, thus maximizing their tax benefits. Here’s how it can work:
Assess Your Itemizable Deductions: Calculate your annual tithing (10% of your income) and add other potential itemizable deductions such as mortgage interest, state and local taxes, and medical expenses.
Plan Your Tithing Payments: Instead of paying your tithing monthly or quarterly, consider paying two years' worth of tithing in one year. For example, if your annual tithing is $10,000, plan to pay $20,000 in one year.
Alternate Between Itemizing and Standard Deduction: In the year you lump your tithing and other deductions, itemize on your tax return. In the following year, take the standard deduction.
Example Scenario
Let’s consider a married couple in Utah with an annual income of $100,000 who typically pays $10,000 in tithing each year. Additionally, they have $10,000 in mortgage interest and $7,000 in state and local taxes.
Normal Year (without lumping):
Tithing: $10,000
Mortgage Interest: $10,000
State and Local Taxes: $7,000
Total Itemized Deductions: $27,000 (less than the standard deduction of $27,700 for married couples filing jointly)
In this scenario, they would take the standard deduction since their itemized deductions are slightly lower.
Year with Lumped Tithing:
Tithing: $20,000 (two years' worth)
Mortgage Interest: $10,000
State and Local Taxes: $7,000
Total Itemized Deductions: $37,000 (exceeding the standard deduction)
By lumping two years of tithing into one year, their itemized deductions significantly exceed the standard deduction, allowing them to reduce their taxable income more effectively in that year. The following year, they would take the standard deduction.
Additional Considerations
Cash Flow Management: Ensure that lumping your tithing is financially feasible. Paying two years' worth of tithing at once requires careful budgeting and cash flow management.
Tax Planning: Work with a financial advisor or tax professional to ensure that deduction lumping aligns with your overall financial and tax strategy. They can help you optimize the timing and amounts of your deductions.
Charitable Contribution Timing: Ensure that your lumped tithing payments are made within the same calendar year to maximize the tax benefit.
Benefits of Working with a Financial Advisor
Financial advisors play a crucial role in helping families navigate the complexities of tax planning. At Balanced Capital, we specialize in providing personalized financial planning services to help you optimize your tax strategy, including the benefits of deduction lumping for tithing and other charitable contributions.
Personalized Planning: We can help tailor your financial plan to include strategies like deduction lumping, ensuring you maximize your tax benefits.
Investment Guidance: Our advisors can recommend the best investment options to align with your financial strategy and risk preference.
Ongoing Support: We provide regular reviews and adjustments to ensure that your financial plan remains effective as your situation changes.
If you would like assistance in setting up a deduction lumping strategy or managing your tithing payments for maximum tax benefit, we are here to help. Contact us today to learn more about how we can assist you with your financial planning needs.
Why my529 is a Smart Choice for Utah Families
Local Tax Benefits: Utah residents enjoy specific state tax benefits, making my529 an even more attractive option for saving for college.
Customizable Investments: The variety of investment options allows you to customize your savings plan to fit your financial goals and risk tolerance.
Comprehensive Coverage: Funds can be used for a wide range of educational expenses, from K-12 tuition to student loan repayments, providing flexibility as your child’s educational needs evolve.
Conclusion
Deduction lumping is an effective strategy for Utah residents, particularly members of the LDS Church, to maximize their tax deductions for charitable contributions such as tithing. By strategically paying two years of tithing in one year, you can exceed the standard deduction threshold, allowing you to itemize deductions and reduce your taxable income. Working with a financial advisor can help you implement this strategy effectively and ensure you make the most of the tax benefits available to you.
Detailed Breakdown of Qualified Deductions
Understanding which expenses qualify for itemization is crucial for maximizing the benefits of deduction lumping. Here are some common deductions that can be combined with tithing to surpass the standard deduction threshold:
Medical and Dental Expenses: These can be itemized if they exceed 7.5% of your adjusted gross income. Expenses include payments for doctor visits, prescription medications, and medical procedures.
State and Local Taxes (SALT): Up to $10,000 can be deducted for state and local property taxes and either state and local income taxes or sales taxes.
Mortgage Interest: Interest paid on mortgage loans for your primary home and a second home can be itemized.
Charitable Contributions: In addition to tithing, other charitable donations to qualified organizations can be included. This can include cash donations, as well as the fair market value of donated goods.
Investment Interest Expense: Interest paid on money borrowed to purchase taxable investments can be deducted, up to the amount of net investment income.
Miscellaneous Deductions: While many miscellaneous deductions were eliminated by the TCJA, certain unreimbursed employee expenses and other costs related to producing or collecting taxable income may still qualify.
Implementing Deduction Lumping in Practice
To successfully implement deduction lumping, consider the following practical steps:
Review Past Tax Returns: Analyze your previous tax returns to identify which years you itemized and which years you took the standard deduction. This can help you plan the best years to bunch your deductions.
Create a Lumping Schedule: Plan out the years in which you will lump deductions. For example, you might decide to lump deductions every other year, ensuring that you maximize itemized deductions in those years.
Track Eligible Expenses: Keep detailed records of all expenses that qualify for itemized deductions. This includes receipts, invoices, and statements for medical expenses, charitable donations, and mortgage interest.
Coordinate with Tithing Contributions: Work with your religious institution to ensure that your lumped tithing contributions are accurately recorded and documented. This will be important for substantiating your deductions with the IRS.
Consult with a Financial Advisor: A financial advisor can help you fine-tune your lumping strategy and ensure that it aligns with your overall financial goals. They can also provide insights into other tax-saving opportunities.
Case Study: Maximizing Deductions for a Utah Family
Let’s consider a detailed case study of a hypothetical family in Heber City, Utah:
The Johnson Family:
Annual Income: $150,000
Annual Tithing: $15,000
Mortgage Interest: $12,000
State and Local Taxes: $10,000
Normal Year (without lumping):
Tithing: $15,000
Mortgage Interest: $12,000
State and Local Taxes: $10,000
Total Itemized Deductions: $37,000 (which is above the standard deduction for married couples filing jointly, but let's see how lumping can further benefit them)
Lumping Year:
Tithing: $30,000 (two years’ worth)
Mortgage Interest: $12,000
State and Local Taxes: $10,000
Total Itemized Deductions: $52,000
In this lumping year, the Johnson family’s itemized deductions significantly exceed the standard deduction, allowing them to maximize their tax savings. In the following year, they can take the standard deduction, optimizing their average deductions over multiple years.