Can taxes be avoided through equal donations?

Question

This is a purely hypothetical question: Say someone wins a million dollars, I’m sure the taxes on that would be around $350,000 to $400,000 (??) – My question is, could those taxes be avoided with an equal donation to a church? If not avoided altogether in a situation like that, how much could the taxes be lowered through donations to a church?

Answer 1

Charitable donations are limited to 50% of your AGI. Excess donations can be carried forward to future tax years.

The maximum Federal tax rate is 35% but since the rates are graduated the total tax will always be slightly less than 35% unless you're already in the 35% bracket.

If you donated the whole amount at once you'd still have to come up with a significant amount in taxes due to the 50% limitation. The amount would depend upon a number of factors but you could use $165,000 as a VERY rough estimate. Now you would be essentially penniless in deeply in debt to the IRS and the carried forward donation would be worth much less in the future years.

Additionally, deductions start to phase out once your income reaches a certain level, further reducing any tax benefit of the donation.

Someone in that situation would be best off by asking the payers of the prize money if they could have it paid directly to the church instead. That way they'd have no income from it themselves and the church would get the benefit of the full amount of the prize.

Answer 2

Hate to say it but the first answerer is incorrect about donating the entire million to avoid paying any taxes, unless you donated the winning ticket to the church before even cashing it in. The most that you can deduct for a charitable contribution is 50% of your AGI, even if you gave more than that, the excess is carried forward, up to a maximum of 5 years. For example, if in your hypothetical question you've won a million dollars. Even if you donated the entire million to your church, you would only get a charitable contribution deduction of $500,000. The other $500,000 you would carryforward to use in the future, for the next 5 years, any remainder unused at the end of the 5th year is lost. Unless you had enough other deductions and exemptions to offset the other $500,000 in taxable income ($1,000,000 lottery winnings - $500,000 allowable charitable deduction) you'd have to pay income tax, except, you wouldn't have any money to pay your taxes with, as you'd have donated 100% of your winnings to the church. You may also need to take into account state income taxes on your winnings. Some states do not give any deduction for charitable contributions (Massachusetts is one such state). So you might end up being taxed in your state on the entire $1,000,000.

Answer 3

No, donations only give you a tax benefit for a portion of the donation equal to your tax bracket, so if you donate $100,000 you'd get at most $35,000 in tax savings if you were in the top bracket, which you woulod be with that much income in a year. A donation is a deduction, which means it's subtracted from your taxable income before figuring taxes, not a credit - credits are actually subtracted from your tax.

There are also limits on what percent of your income you can donate and take a deduction for.

Answer 4

If you won a million dollars and gave it to charity, you would only be able to deduct 1/2 of your AGI to charity in any given year. You would have to carry the rest forward.

Ignoring your other income, if you donated all the money, you would still have to pay taxes on $500,000 even though you gave it away. In future years, you could take a deduction of 1/2 of your AGI until the balance of the donation was deducted.

So in theory you would avoid most of the tax, but not all of it. This is because in the year of your donation, you were in the highest tax bracket and had to pay a high rate of tax on $500,000. In future years your bracket is probably lower and you will not be able to recover the first year's taxes in full.

Answer 5

Your question is not as simple as it sounds. After a certain amount of income your deductions are reduced etc.

Lets take it down to a 10000 contribution to your church and you are under the income limits or any other restraints from taking the deduction. You can general take the deduction and multiple it by your tax rate and that would be your dollar for dollar reduction in taxes. Providing you can itemize you deductions.

That is so general as to almost be useless in answering your question that take many more details to analyze.

Answer 6

You would need to donate the entire million to advoid the taxes...it works like this, you make $30k a year your tax bracket to the fed is 10% sake of argument (your gonna pay social security and medicare and all the other crap too though) so $3k to the fed, you go and donate $10k to a charity that is a recognized deduction so now your taxable income had decreased by $10k which may change your tax bracket; but for this example it doesn't. Now your still responsible for taxes on $20k you kept again not including all other taxes and things paid...so now your amount owed is only $2k @ that 10% so you paid in $3k and you'll get $1k back from the fed. This isn't including your standard deduction which you have to have more deductions than to actually write anything off anyway.

Answer 7

There is nothing to add to this string. The second response is incorrect and the others are dead on.