When is the best time to start your income tax planning for 2018? Oh, about 5 months ago! Okay, you get the point! Most of us don’t really enjoy tax planning and certainly not the dreaded completion of the tax forms by April 15 each year. Take heart, there is at least one thing you can do that is relatively painless and can potentially save you some significant income taxes.
There is a little known strategy called “bunching deductions.” While reviewing a client’s tax information in preparation for their annual review, I looked at their Schedule A (itemized deductions) and quickly realized that they would benefit from bunching their deductions. Here’s the breakdown:
State & Local Taxes (SALT) $10,000 (their new limit effective 2018—previously it was closer to $20,000) Mortgage Interest $10,500 Charitable Contributions $ 4,800 Total $25,300
Since the new tax law raised the Standard Deduction for a married filing jointly taxpayer to $24,000 (extra $1,300 if 65 or older), our client will now only be able to deduct $1,300 ($25,300 – $24,000) of his charitable contributions. To remedy this problem, I recommended that they make their charitable contributions every other year. In the years that they don’t make any contributions, they will still be able to use the $24,000 Standard Deduction. However, in the years they “bunch” their contributions, the tax scenario looks like this:
State & Local Taxes (SALT) $10,000 Mortgage Interest $10,500 Charitable Contributions $ 9,600 Total $30,100
This brings their total itemized deductions to $6,100 ($30,100 – $24,000) above the Standard Deduction limit. Since they are in the 22% tax bracket, the Federal Income tax savings would be about $1,342.
To accomplish this, all you have to do is make all of your contributions every other year. If you’re not sure who you want to give the money to, simply set up a Donor Advised Fund. A good explanation of how a Donor Advised Fund works can be found in this previous blog. If your brokerage firm doesn’t offer one, consider using the South Carolina Christian Foundation, the National Christian Foundation, or your local Community Foundation. You will get the full charitable contribution tax deduction, and you can decide later where to give it.
Of course, your situation will be completely different, but it is easy to determine if it is a strategy that will work for you. (If you have questions, present this strategy to your tax preparer!)
The IRS initial data for 2016 shows that only 30% of taxpayers claimed more than the standard deduction. The forecast for 2018 looks like that percentage will drop to only 10%. “Bunching” your deductions may help you be part of that 10%!
