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Retired Military Finances 201: Should You Make "Big" Charitable Contributions? Thumbnail

Retired Military Finances 201: Should You Make "Big" Charitable Contributions?


I recently was going through some continuing education on the "new" Coronavirus Stimulus Act and the instructor was talking about how even though the law allows you to contribute and deduct up to 100% of your Adjusted Gross Income (AGI) to qualified charities. In essence reducing your taxable and tax bill to $0. Good deal, right? The instructor said no and here is why. Our tax system is progressive. In other words, we have tax brackets and the higher the income the higher percentage you pay in taxes. So, if you contribute 100% of your AGI some of the contribution will reduce your taxes by your current tax bracket. The remainder will reduce you tax bill a lower percentage. Here is an example. Let's assume you're married filing jointly and your AGI is $418,850. You'll get the following "bang for your buck".

Income Range/Total Dollars
Total Savings/Percent
$329,850 - $418,850/$89,000
$172,750 - $329,850/$157,100
$81,050 - $172,750/$91,701
$19,500 - $81,050/$61,550
$0 - $19,500/$19,500

If you compare the first two lines, on line two you'll notice you contribute almost twice as much but get a 16% smaller deduction.

Now, most of us can't actually contribute 100% of our income to charity. But a lot of retired Senior Military Officers and NCOs are in a pretty high tax bracket. So here are some thoughts.

  • If you're considering making a big contribution to a Donor Advised Fund (DAF) a lot before you retire, retire and continue to contribute after your ultimate retirement, then you only want to contribute enough to the top of the tax bracket you anticipate in retirement, maximum
  • If you just want to make a big contribution, but you're not sure when you will retire and what your tax rate will look like, then I would only contribute enough to go down the bottom of your current tax bracket

I don't think most of us make charitable contributions to get the tax deduction. But that doesn't mean you can't maximize the tax benefit of the contribution.

Military Finances are Different

Military finances are as different from civilian finances as a military career is from a civilian career. We think you should work with a financial advisor/planner that works with military members and retirees each and every day. Give us a call or set up a free initial consultation.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 201: 5 Financial Challenges High Earners Could Face During a Biden Administration

Retired Military Finances 101: Do Annuities Ever Make Sense?

Retired Military Finances 301: Just When You Thought The Tax Code Couldn't Get More Complicated

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