First of all, in the spirit of the season, let me be clear that I am not advocating that you reduce your charitable giving. On the contrary, I would encourage you to continue and even increase your charitable giving. One way to do that is to adjust the timing of your charitable contributions to maximize the tax benefits to leave you more disposable after tax income to fund the charities of your choice.
After tax reform, your itemized deductions will be limited to $10,000 in state and local taxes, mortgage interest (with some new limitations), medical expenses to the extent they exceed 10% of your income (not applicable to most of us) and charitable contributions. For purpose of our example, let's say you and your spouse have $10,000 or more in state and/or local taxes, $5,000 in qualifying mortgage interest and $10,000 in charitable contributions each year for a total of itemized deductions of $25,000.
With the new standard deduction of $24,000 for couples,you will only receive a tax benefit on the $1,000 of your itemized deductions in excess of the standard deduction each year.
If you can change the timing of the payment your charitable contributions such that you contribute the same amount but only in the odd years, for example, you would contribute $20,000 in 2017, zero in 2018, $20,000 in 2019 and so on. In the odd years, then, your total itemized deductions would be $35,000. This would result in receiving a tax benefit on $11,000 (excess of itemized deductions over the standard deduction) every other year for an average of $5,500 per year instead of the $1,000 per year in our first example. Depending upon your federal and state income tax marginal tax rate, this extra $$4,500 tax deduction could save you as much as $2,000 per year or more.
There are several ways to implement this strategy. It could be as simple as annual giving near year-end and choosing the last week of December (in the odd years) or the first week of January (in the even years) as applicable. Another option is the use of a donor-advised fund.
Please do not hesitate to give me a call if you would like to discuss this or any other year end tax planning ideas while there is still time to make a difference in your 2017 taxes.
