Bunching charitable contributions can help
business owners qualify for the pass-through deduction.
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The law created a tax deduction for owners of pass-through businesses such as partnerships, S corporations, limited liability companies and sole proprietorships, giving them a 20% deduction on qualified business income. Significantly, the tax break isn't available to owners of certain "service" businesses ?— such as financial advisory firms ?— once their taxable income exceeds $321,400 for married couples in 2019 (and $160,700 for singles).
Because charitable contributions are one of the few deductions that taxpayers can easily and voluntarily dial up or down each year, charitable donations offer a rare way for business owners to reduce taxable income and potentially boost their pass-through deduction.
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"Charity is the one [itemized deduction] you can really control," Mr. Levine said.
For example, the married owner of a financial-advice firm with $421,400 of taxable income in 2019 would be ineligible for the 20% deduction. But let's say this adviser typically makes $10,000 of annual charitable contributions. The adviser could bunch 10 years' worth of charitable contributions into a donor-advised fund to reduce taxable income by $100,000 and qualify for the 20% deduction.
Giving away $100,000 would, after applying the 20% deduction, reduce the adviser's taxable income by $160,000 in this scenario ?— which could have a net effect of reducing the adviser's federal and state income taxes by about $55,000-$60,000, Mr. Levine said. Giving away $100,000 to charity really only cost the adviser $40,000 in this scenario ?— a 60% savings.
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