The new tax law signed into law in December 2017 for future tax years increased the standard deduction from $12,000 to $24,000 for married couples, and half that amount for single filers. As a result, over 80% of the population will use the standard deduction moving forward. Although an increased standard deduction is a good thing, there could be a way to further maximize your situation (minimize taxes) by bunching two key deductions: charitable gifts and property taxes. Let’s take a look at an example for John and Mary Smith:
Property Taxes: $5,000
Mortgage Interest: $8,000
Charitable Gifts: $7,000
Because their standard deduction of $24,000 is greater than their itemized deductions of $20,000 they are losing any tax benefits of giving assets to charity and aren’t able to deduct their property taxes. With no tax planning, they would have a total of $48,000 of deductions over two years ($24k + $24k).
A simple strategy of ‘bunching’ deductions from two years into one year can provide some needed tax savings. If we paid property taxes for the current year in January and the following years property taxes in December, we will have $10,000 of property taxes to deduct. In addition, if we accelerate next year’s charitable contributions into this year, using an account called a Donor Advised Fund, we can increase their charitable gifts from $7,000 to $14,000 in the current tax year. Now their total tax deductions are:
Mortgage Interest: $8,000
Charitable Gifts: $14,000
Because their itemized deductions of $32,000 are now higher than their standard deduction of $24,000, they will itemize their deductions. Next year, they won’t have property taxes or charitable gifts to deduct, and as a result will use the standard deduction of $24,000. They now have a total of $56,000 of total deductions over two years ($32k + $24k). We have captured $8,000 more deductions with good tax planning. Assuming the client is in the 24% tax bracket, their tax savings from this strategy is $8,000 *.24% = $1,920.
Keep in mind the maximum the government allows for State and local taxes (SALT) is $10,000 so the strategy of lumping property taxes from two years into one may not be of benefit if are already over this limit.
Good tax planning requires forethought and a deep understanding of the tax laws. Working with a financial advisor who understands these techniques will maximize your financial plan. To learn more about other tax planning strategies give us a call and we’ll schedule a meeting to discuss your situation. Shakespeare Wealth Management, Inc., 262-814-1600.