Can charitable giving put me into a lower tax bracket and therefore lower my capital gains tax?

Question

The details:
I am going to have a fairly large capital gains this year. I understand that if I am in the 15% or lower tax bracket, then my capital gains will be taxed at 5%. If I am above 15%, then my capital gains will be taxed at 15%. (I've held it for more than 1 year)

Therefore, If I can get into the 15% tax bracket, I will save 10% on my capital gains taxes. Let's say the capital gains was $200K, and my adjusted gross income looks like it will be $9K over the 15% tax bracket cutoff for my non-captial gains tax income. Therefore, if I could get in the 15% tax bracket I would save 20K on my captial gains taxes because it would only be taxed at 5%. So if I donated $9K to charity and it put me in the 15% tax bracket, I would still be $11K ahead.

However, is this possible? From looking at the IRS website and last year's Turbo Tax, it is not clear to me if charitable giving can actually put me in a lower tax bracket.

Thank you for taking the time to answer my question.

The captial gain is from sell of real estate, but no the primary residence. I do not want to do a 1031 exchange, unless it is possible to buy a new primary residence with it.

Answer 1

First of all, you are correct that Charitable Giving will reduce your taxable income and could possibly lower your tax bracket.

However, I don't think you understand how the brackets work. If you have a $200k Capital Gain, you don't have a chance of getting into the 15% bracket. the tax bracket is determined by your total taxable income not just the income not related to the capital gain. So, by my calculations, you'd have to give about $209,000 to charity to get into the 15% bracket. That's counterproductive.

Before you believe anything that is said here, go to the www.irs.gov. Find the link for Forms and Publications. You will come to a list of all the forms and instructions that you can view in pdf format. Pull up the instructions to Form 1040. Turn to page 38 and fill out the Capital Gain Tax Worksheet. You will see what I'm talking about.

It was a nice try though, lol.

Answer 2

Was this real estate a rental property, and did you take depreciation on it? If so, you will have some Section 1250 gains, which could be taxed at 25%. Additionally, your charitable contributions will be limited to 50% of your adjusted gross income, so you can't contribute enough to lower your taxable income to the lowest brackets. From where I stand, it looks like you'll pay 15% on your long-term capital gains.

P.S. - working at H&R Block doesn't make you a tax professional.

Answer 3

Charitable contributions reduce your taxable income but only if you itemize. Per your example it could reduce your income down to the 15% marginal tax bracket for your "ordinary income" which results in a 5% capital gains rate for SOME of your capital gains income but only for the amount that still keeps you under the 25% ordinary marginal tax bracket. For example a taxpayer filing as MFJ status pays an ordinary income tax rate of 15% on taxable income between $14,600 and $59,400 (2005 numbers)and as you stated a 5% capital gain rate. If taxable income is over $59,400 then a capital gain rate of 15% applies. However, the 5% rate will only apply against the capital gains amount that when added to the ordinary income still fit under $59,400. Thus, the vast majority of your capital gains will be taxed at 15%. Sorry.

Answer 4

First, why do you have such a large Capital Gain? If I know what the capital gain is from, I may be able to tell you how to lower it. Also, the charitable contributions have to be fairly large to lower your tax bracket. Make sure you itemize deductions for your mortgage interest, points, medical out of pocket expenses, personal property tax(DMV fees), property tax, unreimbursed employee expenses, and even tax prep fees. The more you itemize, the lower your bracket. Is your capital gain from the sale of a home, or stock?

Answer 5

Yes. Charitable giving works.

Answer 6

yes, however the max deduction for charitable giving is half your adjusted gross income.