Situation 

Joseph(50)and Jessica(47) have been living in Texas for the past 20 years. They both have well-established careers, and have been buying rental properties around the Houston area since they outgrew their first house and decided to turn it into a rental property. Joseph is a commercial airline pilot and has a salary of $255,000. Jessica is a nurse-anesthetist with a salary of $195,000. Over the last 7years, rental costs in Houston have increased by 23%, making each of their properties bring in even more revenue. This year they will have an additional $632,000 in rental income, bringing their household income to $1,082,000 for 2025.

Texas does not have state taxes, but Joseph and Jessica will still have a marginal tax rate of 37%. This means that they will have a tax obligation of $326,516. This federal tax obligation has been cutting into their profits from the rental properties. They like to use a portion of the profits from their rental properties to donate to local programs. They believe that they can do most charity by helping those living in their community.

Joseph and Jessica have been talking with their financial planner about the increase that they have been seeing in their rental income this year and how they can continue to diversify their financial portfolio. As they discuss options they get onto the subject of taxes and how much of their income goes to federal taxes. Their financial planner has tax mitigation techniques that they review, along with the savings they can expect with participation.

Solution

Joseph and Jessica discuss the options they have and decided that participating in the Enhanced Charitable Deduction strategy would be the best option for them. Not only will they be able to save on their tax obligation, but they will also be making large donations to local charities that help under-served communities. They feel good about the fact that they will be saving in taxes and will be helping with communities in need. These charities have already been vetted and meet all the requirements to receive Joseph and Jessica’s donations.

As Joseph and Jessica review the specifics of this program, they learn that they will contribute to an LLC. The funds they contribute to the LC are used for the capital contribution, legal fees, and expenses. The LC acquires a loan that will be added to the donation to increase the amount of giving to five times the contribution amount. The amount of the capital contribution and the loan are then donated to a qualified 501(C)(3) charity.

Results

Joseph and Jessica decide to do the minimum funding amount of $200,000. This contribution and the loan that will be acquired will result in a donation of $1,000,000, which will then result in a charitable donation write-off of $1,000,000 and a taxable income of $85,000. With this reduction in their taxable income, they will see a reduction in their marginal tax rate from 37% to 12%. The reduction in their marginal tax rate and taxable income will result in a net savings of $119,835 in 2025.