As 2018 is quickly coming to a close, we’ve been busy wrapping up year-end planning. Last year’s last-minute passage of the Tax Cuts & Jobs Act (TCJA) sent us scrambling a year ago to take advantage of opportunities that were going away. This year-end has been a bit calmer when it comes to tax changes but has also forced us to approach things differently. We’ve had fun strategizing for our clients and were honored to lend a hand to several reporters looking to better understand and communicate the new opportunities. David has spoken with several journalists over the past few weeks and got quoted a handful of times:

Below are our expanded thoughts on one of the most popular topics we’ve discussed with clients this year:

Itemized Deductions & The Impact on Charitable Contributions

The changes to itemized deductions mean fewer taxpayers will itemize under the TCJA. State and local taxes (SALT) are limited to $10,000 and the only other notable deductions available for most are mortgage interest and charitable contributions. Between state income taxes and local property taxes, most of our clients are hitting the $10,000 SALT limit. Therefore, married couples filing jointly who also pay at least $14,000 in qualified mortgage interest will continue to itemize, since combined with SALT they will exceed the new $24,000 standard deduction for joint filers. For these taxpayers, charitable contributions still have the same impact of reducing your tax bill at your marginal rate that they have in the past.

Conversely, taxpayers without a mortgage may not receive a tax benefit on charitable contributions until they exceed $2,000 (if filing single/separately) or, if filing jointly, until giving exceeds $14,000! For many, this will be a disappointment, but not change their giving behavior, as taxes were never the primary motivator.

An interesting opportunity arises though for those with $10,000 of SALT and a significant mortgage, but where the annual interest is a bit shy of $14,000/yr. For example, a married couple with $10,000 of SALT, $13,000 of mortgage interest, and $1,000 of charitable contributions would not receive any tax benefit over simply taking the standard section of $24,000. However, each dollar they give to charity above that would reduce their taxes at their marginal tax rate. For example, if their marginal tax rate was 30% (Fed + state) they’d save $0.30 for each dollar they give. Therefore there’s an opportunity for them to “bunch” their charitable contributions. By giving $2,000 this year and $0 next year instead of $1,000 in each, they would save $300.

Using a donor-advised fund allows you to optimize this bunching strategy even further. Continuing with the example above, the married couple could contribute $6,000 to a donor-advised fund in year one, reduce their taxes by $1,500 and then distribute $1,000 per year from their donor-advised fund to their favorite charity every year for the next six years. This would accomplish their objectives of giving $1,000 per year, while also maximizing their tax deduction that would otherwise be worthless. This a great planning opportunity for those who are charitably inclined and able to front-land their gifts.

If you think the above situation applies to you but didn’t take advantage of it this year, don’t worry, the same opportunities will be available for 2019.