How to Leverage the New Itemized Deduction Rules and Save Taxes

Robert Falcon, CFP®, CPA/PFS, MBA |

Stack your charitable contributions to save on your taxes year after year

Many folks are upset by the changes to the standard deduction and its impact on their ability to itemize deductions beginning in 2018. Essentially, Married Filing Jointly (MFJ) couples now need to have more than $24,000 of itemized deductions before they can itemize, and this includes a $10,000 cap on their state income and real estate taxes. However, when you actually run the numbers, the new law helps most couples. Further, if you are close to having $24,000 in itemized deductions in any one-year, the following strategy allows you to maximize your deductions and minimize your taxes year after year.

There has been a lot of disinformation about this Tax Act that should be cleared up right away. The government is now “giving” you $24,000 of deductions through a standard deduction. What this means is that couples that file Married Filing Jointly (MFJ) can get the greater of $24,000 or their total itemized deductions. The old (2017) standard deduction was only $12,700, and therefore many more people could “itemize,” as their total itemized deductions easily exceeded the $12,700 threshold. In fact, for the tax year 2015, the average itemized deduction was $24,081 for MFJ couples with Adjusted Gross Income (AGI) under $200,000 according to IRS estimates.

After state and real estate taxes are capped in 2018, the average itemized deductions will fall under $24,000. Let’s assume the itemized deductions of that “average” 2015 couple consisted of $12,081 of state and property taxes plus $6,000 of mortgage interest and $6,000 of charitable contributions. Under the new law, the couple would lose $2,081 of state and property taxes and have a total of $22,000 of itemized deductions in 2018. If this couple did no tax planning, they would take the $24,000 standard deduction each year as it is larger than their actual deductions.

But here is where a little tax planning can help. Since the couple likes to contribute to charities, they could “stack” or double their charitable contributions every other year and make $0 contributions the next. Using our example, if the couple doubled their 2018 contributions to $12,000, their total itemized deductions would be $28,000, so they would itemize. In 2019, they would make $0 in charitable contributions, have total itemized deductions of $16,000, but still get the standard deduction of $24,000. Using this strategy, the couple would get a total of $52,000 of deductions for a cash outlay of $44,000 over a two year period. If they simply paid the $6,000 in contributions each year, they would get $48,000 of deductions for their cash outlay of $44,000.

Some taxpayers might not be comfortable ignoring their charities for a full year, but there is a way around that problem too. Donor-advised funds such as Fidelity Charitable or Vanguard Charitable allow you to get a tax deduction when you put money into the account. That’s right. Just by funding the donor-advised fund, you get a tax deduction. At any time during the year, you can direct funds from the account to your specific charities electronically whenever you want, but since you already got a deduction when you funded the account, you don’t get another deduction when you send money to your charities.

So if you contributed $10,400 to your Fidelity Charitable account on January 1, 2018, you would receive a $10,400 charitable deduction in 2018. The funds would sit at Fidelity until you went online and electronically transferred some of the money to your favorite charity. In this example, you could direct Fidelity to send $100 each week to your church for 2 full years. Another huge advantage to donor-advised funds is that you can fund them with appreciated stocks or mutual funds that you already have in your brokerage account. If you contribute appreciated securities that you have held for at least a year, you will get a charitable deduction equal to the fair market value of the stock and never have to pay capital gains on the disposition, plus you get the satisfaction of funding your favorite charities without using your cash!!

Don’t feel intimidated by the new tax law changes. Take what they are giving you and do what you can to minimize what you pay in federal taxes. You have the right to pay only your fair share, so why pay more?