Case Study 1 – Jane and John (married couple in their 40s) Plan to Reduce Taxes and Increase Income Using Charity

Case Study for Jane Doe Age 40, married, two children 7 and 9, personal injury attorney with her own private practice (service business).   Jane has consulted her advisor to help her focus on and determine her objectives.

Jane’s Objectives:

  • Additional future income of $4,500 per month to Endow at Jane’s age 65
  • Pay less income tax
  • Support her favorite charity – a high school project — with a current contribution and a future endowment

Jane’s taxable income, filing jointly with her husband, was $367,000 in 2018.  By exceeding the $315,000 taxable income threshold, her 199A deduction was reduced, causing Jane and her husband to pay more income tax.  Jane is projecting taxable income of $530,000 from her practice in 2019.   By exceeding the 199A threshold of $415,000, Jane will be entitled to a zero deduction on her service business income.

Jane’s husband, John, is a salaried lawyer at large firm and the family’s annual budget is covered by his earnings. John is enrolled in the 401(k) at his firm.  Jane also makes the maximum annual contribution to her qualified retirement plan.

Based on Jane’s objectives, the advisor has recommended that Jane use a Charitable Pooled Income Fund.    

Jane makes a $13,000 contribution to the high school project for immediate use.

Jane makes a $247,000 contribution in cash and non-cash assets to a Charitable Pooled Income Fund that will endow the high school project after both Jane and her husband have died.

Jane will receive a tax deduction that will reduce her taxable income to below the $315,000 threshold to receive a maximum 199A deduction.

The Pooled Income Fund is projected to produce $4,500 per month of additional income to endow for the life of Jane and her husband, starting at Jane’s age 65.

At the end of the payments to Jane and John, their share of approximately $1,000,000 will go from the Pooled Income Fund to endow their high school project.