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Tips for Tax Year with Large Donation

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  • Tips for Tax Year with Large Donation

    I'm looking for advice for how to take advantage of tax year where I am able to make a very large donation to our donor advised fund (DAF) and reduce our marginal tax bracket from 35% to 24%.


    - Typically donate ~$10-15,000 to favorite charities through our donor advised fund (DAF)... love thought of creating "mini-endowment" and donate investment returns.
    - Two primary income sources: W2 (~$400,000) and 1099 ($145,000). Married with single income.
    - Investments: Max out W2 401K, HSA, Backdoor Roth x 2. Plan to contribute 20% 1099 Profits to I401K pretax
    - Brokerage Account ~$165,000 with $42,000 Long Term Capital Gains
    - 2020 Taxable Income ~ $500,000 (Line 15 1040)


    1. I'm strongly considering transferring $165K from my brokerage account to our DAF this year vs. 3 years. It would be nice to fully fund our donation plan moving forward. Any issues with this thought process?

    2. Megabackdoor Roth question: I currently have a VG Solo 301K for 1099 business and contribute $19,500 employee pretax to W2 401K. I'm thinking about doing a rollover of these funds to TD Ameritrade or Fidelity to take advantage of a Megabackdoor Roth. Am I able to make an employer pre-tax contribution to 401K (20% profits ~ $25,000) and then add another $33,000 post-tax to Roth while paying 24% marginal tax rate? I anticipate transitioning to part-time in my 50s (5 - 9 years from now) and plan to do Roth conversions at that time, but would probably still be in the 24% tax bracket.

    Thanks for any advice you're able to offer.

  • #2
    1. Batching multiple years of donations is often a great idea to lower your marginal tax bracket. For many, it's the only way to get above the standard personal exemption level whether single or MFJ.

    2. MBD Roth is not available through the usual custodians (VG, Fido, Schwab, TDA, ETrade etc.) standard 401k plans as none allow after-tax contributions. It would require a custom plan. If interested there are several threads on this forum on how to do this.


    • #3
      Thanks Gas Fire.

      Are you able to comment on whether my assumption is correct about MBD Roth with 1099 Income? Am I able to contribute post tax to Roth after pre tax contributions? Use MBD Roth instead of brokerage up to $58,000 contribution limits for 1099 income?


      • #4
        FYI careful you dont hit the DAF contribution limit.

        Annual income tax deduction limits for gifts to public charities, including donor-advised funds, are 30% of adjusted gross income (AGI) for contributions of non-cash assets held more than one year.



        • #5
          As long as there are no control or affiliated service group issues between your W-2 and 1099 income, you can make the max contribution if the 1099 supports it. Some of the MBD users even make 100% of their contribution after-tax.

          Regarding the 30% AGI DAF charitable deduction limit, there is a 5 year carryover for unused deductions. Some good tax planning before the end of the year can help you decide how much to contribute to your DAF. Since this contribution must be before 12/31 but the i401k contributions can be until the tax filing deadline, you do have some ability to adjust your income level. Hopefully some of the savvier financial minds on this forum suggest how to go about this.