September 4, 2018

A "Bunch" of Tax Planning Ideas

Ann Casey

With the new tax laws in place, are you among those who will no longer itemize due to state and local tax deduction limits ($10,000 per year) and the doubling of the standard deduction ($12,000 for individuals and $24,000 for married couples)?

It sounds attractive—“tax simplification”—but you may be leaving some tax benefits on the table. With a few easy steps, you can maximize the impact of your deductions by “bunching” them into one year, when you itemize deductions. In other years, you claim the standard deduction. In total, you claim more deductions than you would if you simply took the standard deductions every year.

The simplest way to explain this is to compare bunching to the do-nothing plan of paying the same deductible expenses every year (see chart). Just timing when you make charitable contributions will produce more total tax benefits. One way to do this is to double your contributions to your favorite charities in the year you plan to itemize deductions.

However, if you are concerned about how this will impact the budget of the charities, or if you think of other charities you wish to support but you didn’t plan to itemize that year, Madison Community Foundation can help.

A contribution to a MCF donor advised fund is deductible in the year you make it. You can then choose the time to recommend distributions from the fund. This is a great way to claim a tax deduction immediately for supporting your favorite charities in the future.

 

  PAY SAME EVERY YEAR BUNCHING DEDUCTIONS
  YEAR 1 YEAR 2 YEAR 1 YEAR 2
Taxes $10,000 $10,000 $10,000 $10,000
Mortgate interest 7,000 7,000 7,000 7,000
Charitable contributions 6,000 6,000 12,000 --
TOTAL $23,000 $23,000 $29,000 $17,000
Standard deduction $24,000 $24,000 $24,000 $24,000
Actual deduction $24,000 $24,000 $29,000 $24,000
TOTAL DEDUCTION
OVER 2 YEARS
$48,000  $53,000 
 
BONUS PLANNING IDEA: If you are 70½ or older, you are eligible to make charitable contributions directly from your Individual Retirement Account. These gifts help satisfy your required minimum distribution for the year and reduce your taxable income, even if you don’t itemize deductions. IRA distributions cannot go to donor advised funds, but they can be made to any other MCF fund or directly to your favorite charities.
 
As always, everyone’s tax situation is unique and you should consult your own tax advisor before employing any tax planning strategy.
 
Want to speak to Ann directly? Call (608) 232-1763 or email Ann at acasey@madisongives.org.