Story:
Jeremy is a Registered Investment Advisor who lives in New Jersey. He is 48 and the primary income producer in his household. Over the last eighteen years, Jeremy has been building his Registered Investment Advisor practice, adding substantial assets under management each year. He now has $380,000,000 in assets he oversees and uses multiple fee structures for his clients, including management, performance-based, and asset-class-based fees. His assets under management fees provide him with $2,400,000 in income annually. He also earns $388,000 a year from his personal portfolio. In 2022 he will have a total taxable income of $2,788,000. Jeremy can look at the last few years to see how his income has been trending and project a similar income over the next five years.
Situation:
Jeremy will have a taxable income of $2,788,000 for 2022. He will owe 48% in federal and state income tax, resulting in a tax obligation of $1,338,240 in 2022. Jeremy is well-versed in many tax savings strategies and decides that a leveraged charitable deduction strategy is his best option. He selects to do a $500,000 buy-in. This strategy results in a $2,500,000 charitable donation. He will utilize $500,000 of the total charitable deduction each year for five years.
Result:
Using the leveraged charitable deduction strategy, Jeremy can reduce his taxable income from $2,788,000 to $2,288,000 in the first five years (2022). With Jeremy’s steady income and the fact that he will be using $500,000 of the charitable deduction every year, he can expect to save $240,000 in taxes each year until he has expended the $2,500,000 charitable deduction. The leveraged charitable deduction strategy will result in a net gain of $700,000 in five years.