Interesting observation. However, I think it’s a bit more complicated than you make it out to be. Let’s say I’m a very high earner and the standard deduction is tiny compared to my total income. If I give 10% each year, that 10% would have been taxed at a very high marginal rate. If I give 50% in a given year, the first 40% of that 50% would have been taxed at a comparatively lower marginal rate, and thus I get a smaller total refund.
The best strategy might be giving 30% every 3 years or something like that.
The argument also doesn’t work if you have good reasons not to take the standard deduction, e.g. enough kids and other things you get tax breaks on.
There is a handy tool on the W-4 to determine how many exemptions you should claim based on your expected donations. For 50% of income, I remember the exemptions being ~10.
I believe there’s a space to write the amount of money you plan to donate on your W-4, although it’s on the back of the sheet or something like that (the HR person at the last company I worked at wasn’t aware of it).
Am I correct in thinking that under the UK tax system the consideration you have outlined in your post does not apply (because we do not have a standard deduction if I understand correctly), and in fact the opposite becomes true once you hit the higher tax bracket for the reasons outlined by John_Maxwell_IV above? If you are not earning above the higher tax bracket then the two approaches would be equivalent?
Neil I believe that’s true for the UK. For two reasons
No such thing as a standard deduction
Donations up to the higher tax threshold are not ‘deductible’ but the 20% tax paid on these pounds goes to the charity as an extra donation.
It’s only above the 20% tax rate (higher tax bracket) that you get a refund (if you pay the 40% rate you get 20% back and 20% goes to the charity as above).
So this approach would be counter productive if you earn moderately above the higher tax threshold. The exception would be if you earn so far above the higher tax bracket that donating 50% every 5 years would leave you above the higher tax bracket threshold that year. (However in that case you should probably be donating more than 10% pa ;) )
Interesting observation. However, I think it’s a bit more complicated than you make it out to be. Let’s say I’m a very high earner and the standard deduction is tiny compared to my total income. If I give 10% each year, that 10% would have been taxed at a very high marginal rate. If I give 50% in a given year, the first 40% of that 50% would have been taxed at a comparatively lower marginal rate, and thus I get a smaller total refund.
The best strategy might be giving 30% every 3 years or something like that.
The argument also doesn’t work if you have good reasons not to take the standard deduction, e.g. enough kids and other things you get tax breaks on.
I believe there’s a space to write the amount of money you plan to donate on your W-4, although it’s on the back of the sheet or something like that (the HR person at the last company I worked at wasn’t aware of it).
Good point, the best strategy will vary based on income. I guess getting above that $6,500 is the first hurdle.
Am I correct in thinking that under the UK tax system the consideration you have outlined in your post does not apply (because we do not have a standard deduction if I understand correctly), and in fact the opposite becomes true once you hit the higher tax bracket for the reasons outlined by John_Maxwell_IV above? If you are not earning above the higher tax bracket then the two approaches would be equivalent?
Neil I believe that’s true for the UK. For two reasons
No such thing as a standard deduction
Donations up to the higher tax threshold are not ‘deductible’ but the 20% tax paid on these pounds goes to the charity as an extra donation.
It’s only above the 20% tax rate (higher tax bracket) that you get a refund (if you pay the 40% rate you get 20% back and 20% goes to the charity as above).
So this approach would be counter productive if you earn moderately above the higher tax threshold. The exception would be if you earn so far above the higher tax bracket that donating 50% every 5 years would leave you above the higher tax bracket threshold that year. (However in that case you should probably be donating more than 10% pa ;) )