When my wife and I first started dating in college – and back before I knew anything about personal finance – I often said that I wanted to learn to live on 1/3 of my income, save 1/3, and give away 1/3. However, we never discussed taxes and how our giving should occur. Should I tithe pre-tax or post-tax?
In this post, we will walk through our thought process on charitable giving, how it will impact our taxes, and how our giving might change in the near future after further consideration.
Let’s dig in.
Over the last 18 months, our numbers have looked a lot different than the original plan of giving 1/3 of our income. We have saved about 20%. Lived on about 20%. More than 30% has gone towards paying down student loan debt. 20-25% has gone to taxes. What’s left (only 5-7%) has gone towards charitable causes (mainly tithing).
We stared to realize that, for now, this 1/3 charitable giving number seemed quite high (and random). As reality set in, we adjusted this number down to 10% with the hopes of increasing our charitable giving each year.
Speaking of 10%, why is this very specific “10% number” talked about so much?
Well, whether your giving has a religious base or not, most people who tithe 10% of their money can find the root of their giving in the book of Genesis when Abraham gave 10% of his resources back to the priesthood.
This number, as arbitrary as it may seem, provides a pretty good foundation for charitable giving. Whether you give slightly less or slightly more than 10% is up to you.
10% of what?
Yet, all of this begs one fundamental question: what “10 percent” are we talking about here?
Is this 10% of our gross income? Pre-tax income? 10% of our take home? Some may even consider it to be 10% of their discretionary income.
As any long-time reader will know, I am a firm believer that the target audience reading this blog is quite intelligent. It is not the purpose of this website to tell you how to spend, save, or give your money.
However, it is the purpose of this website to make you think and to help you make intentional decisions by arming you with information.
So, have you thought about what your giving percentage is and how to calculate this number? If you give 10%, where does this 10% come from?
This is the question my wife and I have struggled with lately.
Should I Tithe Pre-tax or Post-tax?
For the past 18 months, we have given 10% of our take home pay. Maybe slightly more when you incorporate other random charitable giving. (We also give 25% of the profit from this website to causes we believe in).
Given that our student loans will (finally!) be gone at the end of this month, my wife and I have started discussing what we will do with the additional money we will start to cash flow.
As I preach, we want this decision to be intentional. More and more, we are considering giving 10% of our pre-tax income instead of only giving from what we take home.
We figure that if we the government gets its share from our pre-tax income, then our tithing probably deserves the same sort of treatment.
After all, Abraham’s example was to give the first 10% and not 10% of what was left after he picked through it. It had to do with acknowledging where his resources came from, and trusting that it would continue.
How Does This Impact Our Taxes?
Fortunately, giving money to charitable causes can provide more than just an uplifting feeling by doing the right thing. The government also honors charitable giving by decreasing our tax burden.
However, with the new standard deduction of $24,000 for married couples ($12,000 for singles), charitable giving must be part of a pretty large itemized deduction for it to decrease our tax burden.
Note: If you take a standard deduction, it may make more sense to double up your charitable giving in one year to overcome that large number and then give nothing and take full advantage of the large deduction the next.
In our situation, the interest from our new home purchase (and the repeal of the Pease Limitation) in addition to the $10,000 State and Local Tax (SALT) deduction will allow us to take advantage of additional charitable giving opportunities.
In other words, the SALT deduction and the interest from our home will put us above the $24,000 standard deduction. So, it makes more sense to itemize if we decide to give to charity.
Given that we fall pretty squarely into the 32% tax bracket, the way I view it is that any money we give will reduce our overall tax-burden by $3,200 per $10,000 given to charity.
This seems like a pretty good deal to me. Who wouldn’t rather choose where their charitable givings go? The alternative is having additional tax levied on us and letting the government decide.
How does this Impact Our Journey to FI?
The naysayer might point out that, while charitable giving produces a tax benefit, we are still sacrificing money that we could otherwise put towards achieving early financial independence.
To this person, I’d say two things. First, they are right – it does delay our journey. The second thing that I’d say is that they are missing the point.
If we spend our entire journey with the final destination in mind – while we ignore things that are important to us along the way – what’s the point?
If giving to those in need (which is where the vast majority of our church’s money goes as shown in the monthly expense reports) delays our journey, I think that’s entirely worth it. Giving to those in need has always been a major goal for both my wife and me.
And, yes, we also give of our time and our talents. Not just our money.
This doesn’t even bring up what this lesson implicitly teaches our kids, which is that it is possible for people to be financially literate, make specific financial goals, and to still prevent money from becoming our God.
There are not many financial decisions that require more of an intentional thought process than where and how we give of our resources.
Hopefully, today’s post has encouraged you to think about this topic, which isn’t discussed often enough in this community.
Do you give to charity? How much do you give? Is your number calculated on pre-tax or post-tax money? Let us know in the comments below.