Lumpy Itemized Deductions: Let the Strategy Games Begin

Nick Jensen, CPA             

Associate Advisor

Now that the Tax Cuts and Jobs Act has been signed into law new strategies are emerging that individual taxpayers should consider.  Under the new law the standard deduction is increased for individual taxpayers through the year 2025.  The new law also includes limitations or elimination of some itemized deductions.  The result of this is that many taxpayers who usually itemize their deductions will simply take the standard deduction instead.  This will simplify tax preparation but may have the effect of leaving some deductions on the table.  One such deduction is gifts to charity.

Strategize your Charitable Giving…Maximize your Tax Benefits

If you are fortunate enough to make it a habit of annual giving to charity and you used to itemize your deductions, then the tax benefit of your habit of gifting to charity will be lost under the new law.  However, if you are willing to lump multiple years of your contributions into one year then you could conceivably itemize in that year to enjoy the tax benefit of the gift.  Then don’t give in future years.  This results in a ‘lumpy’ gifting pattern versus a fairly predictable annual amount.

If the donor is concerned that this large gift followed by years of no donations could cause problems for the charity, then the donor should consider putting the asset into a donor advised fund (DAF).  These funds are offered by a variety of institutions from local community foundations to large brokerage houses.  The advantage of setting up a DAF is that the assets can be contributed up front, grow tax free, and then be distributed to the chosen charities in future years.  This smooths the cash flow to the charity. A DAF can be contributed to on an on-going basis.  This strategy could be replicated in future years by giving a large amount to a DAF in year 1, then nothing in years 2 and 3, and then another large amount in year 4, and so on.  By giving in this manner, the taxpayer can maximize the use of his/her deductions in the year(s) of contribution, and also maximize the use of his/her standard deduction in the off years.

 

When looked at over a multi-year period the tax savings of this approach can be significant.

Example 1: Taxpayer Just Over the Standard Deduction:

Let’s say a married couple with Adjusted Gross Income (AGI) of $150,000 gives $10,000 to their church every year.  They also typically have other itemized deductions totaling $15,000. If they grouped 3 years of gifting into one year, they could itemize in the year they made the donation and then take the standard deduction in years 2 and 3.  If they are in the 22% tax bracket then they would pay $3,960 less taxes under the ‘lumpy’ approach than if they contributed the same amount each year.

Lump Sum Gifting2018201920203 Year Total
AGI150,000150,000150,000450,000
Itemized Deductions45,00015,00015,00045,000
Standard Deduction24,00024,00024,00048,000
Taxable Income105,000126,000126,000357,000
Federal Tax23,10027,72027,72078,540

 

Regular Gifting2018201920203 Year Total
AGI150,000150,000150,000450,000
Itemized Deductions25,00025,00025,00075,000
Standard Deduction24,00024,00024,000
Taxable Income125,000125,000125,000375,000
Federal Tax27,50027,50027,50082,500
Savings4,400(220)(220)3,960

**Higher of standard or itemized deduction is indicated in bold font.

Example 2: Taxpayer Just Under the Standard Deduction:

Let’s use the same facts as in the previous example except they only give $8,000 to their church. In this case they would pay $3,300 less taxes under the ‘lumpy’ approach than if they contributed the same amount each year.

Lump Sum Gifting2018201920203 Year Total
AGI150,000150,000150,000450,000
Itemized Deductions39,00015,00015,00039,000
Standard Deduction24,00024,00024,00048,000
Taxable Income111,000126,000126,000363,000
Federal Tax24,42027,72027,72079,860

 

Regular Gifting2018201920203 Year Total
AGI150,000150,000150,000450,000
Itemized Deductions23,00023,00023,000
Standard Deduction24,00024,00024,00072,000
Taxable Income126,000126,000126,000378,000
Federal Tax27,72027,72027,72083,160
Savings3,300003,300

**Higher of standard or itemized deduction is indicated in bold font.

While tax considerations should not be the primary reason for gifting, it certainly makes sense to keep more out of Uncle Sam’s pocket and potentially give more to the charity of your choice. Consult your tax and/or financial advisor to see if this type of strategy would work for you.

For more information on this topic please contact Nick A. Jensen, CPA at John G. Ullman & Associates, Inc. (800) 936-3785 jensenn@jgua.com

 

By | 2018-08-08T12:57:37+00:00 January 25th, 2018|The Blog @JGUA|