Over the last few weeks we’ve discussed the most efficient ways to give to charities and that our goal with our clients is to help them give in ways that gives them the most tax benefit. We want to enable them to not only save money, but to have more to give to those organizations that are important to them. The deductibility of those gifts is a key factor in our tax benefit strategies, so the question we’ve been asked is did the changes in the tax code alter the benefit of charitable giving?
Altered but Not Eliminated
The common deductions for average tax payers are property taxes, mortgage interest, medical expenses, and charitable giving. The Tax Cuts and Jobs Act (TCJA) of 2018 drastically changed the way we look at all those tax deductions, not just gifting. Prior to the TCJA, an average married couple that had a mortgage on their home and were regular charitable givers were exceeding the Standard Deduction on their personal tax return and therefore paying less taxes by itemizing their deductions. A married couple filing a joint (MFJ) tax return would commonly have viable deductions of $15,000-$20,000, well above the previous standard given by IRS, making itemizing a tax benefit. But the latest tax reform act increased the standard deduction across all filing statuses and therefore made the benefit to itemize deductions almost obsolete. The TCJA raised the standard deduction for a MFJ tax return to $24,400 (for 2019). That means that before we even begin to document and calculate what deductions we might have, IRS knocks $24K and some change off our income. That’s not a bad thing and takes a lot less work.
But there is still a way to pay the same amounts that you have always paid, especially for property taxes and charitable giving, but change the how or the when it is paid to obtain a tax benefit. How? Stacking Deductions. By increasing, or stacking, deductible expenses in one year, over and above the standard deduction amount, and then decreasing those same expenses the next year and claiming that wonderful new raised standard deduction instead. We suggest choosing a year, odd or even, and deciding this is a Stacking Year or this is a Standard Year, then making spending decisions based on those guidelines.
If we look at the possible deductions commonly utilized for itemizing, only property taxes and charitable giving are easily manipulated to achieve the stacking benefit. Mortgage Interest is usually tied up in an amortized schedule of monthly payments and is not easily altered. Medical expenses are not usually scheduled or routine, but if you have the choice to schedule a needed procedure at the end of a Standard Year or at the beginning of a Stacking Year, choose the Stacking Year appointment. An HSA contribution can also be manipulated into Standard/Stacking years if you have control of those payments.
How do I stack my property tax deduction?
Change when you pay your annual property taxes. Most property taxes are DUE January 31st, but we’ve commonly recommended paying them by December 31st to get that tax deduction, right? Let’s use 2019 as an example: Property Taxes for 2019 are due January 31, 2020. If payment is made in January, no deduction on the 2019 tax return is taken, but then in December 2020 the taxes for 2020 are also paid before 12/31, and there is now double the amount of property taxes paid in one year with no late filing penalties and no increase in the amount of property taxes paid. In the example, 2019 would be a Standard Year and 2020 would be a Stacking Year. Now the TCJA set a max on the deduction of State and Local Tax (SALT) at $10,000 per year, but with the average property tax amounts being $3,000-$8,000, when those are doubled to $6,000-16,000, the entire amount will not be available for the itemized deduction, but pushing up to that $10,000 max is still a benefit.
|When Taxes are Due vs When Taxes are Paid|
|Standard Year||Stacking Year|
|2019 Taxes||Due 01/2020||Not Paid 12/2019||Paid 01/2020|
|2020 Taxes||Due 01/2021||⇒⇒⇒⇒⇒⇒⇒⇒⇒⇒⇒||Paid 12/2020|
|Standard Deduction Taken||Equal Double Deduction|
How do I stack my charitable giving deduction?
Change when or how you give to your charitable organizations. Changing When you give can easily be accomplished by delaying your annual year end gifting until after the first of the year. And then in that same Stacking Year giving all of your next year’s gift before year end. If you are a weekly or monthly giver, estimate how much on average you give annually and give it at the beginning and end of your Stacking Year. It might be nice to advise the organization that this is your annual giving and not to expect this as a monthly amount.
Another option is to change the How you give by utilizing the beauty of a Donor Advised Fund (DAF) that we’ve mentioned in a previous blog: Because You Asked: What Is the Most Efficient Way to Give to Charity? Part 3: Donor Advised Funds. These charitable instruments are established and funded by individuals and act similar to private foundations that accept and distribute donations. With a DAF, funds can be given during your designated Stacking Year providing the tax deduction and then you have control of when it is distributed during the year to your charitable organizations. You can even establish regular, automatic distributions to your charities. Another benefit of the DAF’s is that the funds within the DAF ‘grow’ as an investment so that you have even more to give. How great is that?
Example of Stacking Benefit
Then Why should I Stack Deductions? Real simple…Pay Less Taxes. Isn’t that a goal in most people’s life? I mean who wants to pay the government more money? Here’s an example between No Changes, a Standard Year and a Stacked Year: Taxpayers = Married Filing Joint (based on 2018 amounts, and no Medical deductions)
|No Changes||Standard Year||Stacked Year|
|Adjusted Gross Income||$140,000||Adjusted Gross Income||$140,000||Adjusted Gross Income||$140,000|
|Mortgage Interest||$3,142||Mortgage Interest||$3,142||Mortgage Interest||$3,142|
|SALT: Property Taxes||$4,448||SALT: Property Taxes||$0||SALT: Property Taxes||$8,896|
|SALT: Sales Tax||$3,709||SALT: Sales Tax||$3,709||SALT: Sales Tax||$3,709|
|Total SALT:||$8,157||Total SALT:||$3,709||Total SALT
|Charitable Contributions||$10,143||Charitable Contributions||$0||Charitable Contributions||$20,286|
|Total Deductions||$21,442||Total Deductions||$6,851||Total Deductions||$33,428|
|Standard Deduction||$24,000||Standard Deduction||$24,000||Standard Deduction||$24,000|
|Taxable Income||$116,000||Taxable Income||$116,000||Taxable Income||$106,572|
That’s a Tax Savings every other year of $2,000! Just by making a few changes and doing a bit of planning.
We believe most people we work with desire two things (at least): They want to give to organizations and causes that are meaningful to them; and they want to pay less in taxes. By Stacking Deductions, we are able to help meet both goals, and that’s a win-win in our books.