Creative Year-End Stocking Stuffer Idea
By Joe Mastriani, CPA
Buckno Lisicky & Co
Individual taxpayers, who have two options when they file their personal federal income tax returns — take a standard deduction or itemize deductions — usually select the option that reduces their overall tax liability the most. Due to the recent tax law changes, the standard deduction available for taxpayers became much larger — almost twice what it was previously. This change makes it less likely that the sum of a taxpayer's itemized deductions will exceed the larger standard deduction, especially with new limits in place on deductible state and local taxes (SALT, including real and personal property taxes, state and local income taxes, and sales taxes) and mortgage interest.
A potential side effect of fewer taxpayers itemizing their deductions is that these taxpayers may choose to reduce or eliminate charitable contributions to not-for-profit organizations because their contributions will no longer reduce their personal income taxes. What can taxpayer-donors do to retain the tax deductibility of donations?
One strategy that allows individuals to continue to donate and receive tax benefits is to "bunch" donations to charities in specific years, while limiting donations in other years. When individual taxpayers contribute by bunching donations, they combine multiple years of "normal" annual charitable contributions into a single year. In the bunch years, the relatively large charitable contributions, in combination with other itemized deductions that cannot be timed this way — generally, mortgage interest and SALT taxes — will increase the likelihood of exceeding the standard deduction and thus provide the taxpayers with additional tax savings.
Here’s an example: Art and Alice are married taxpayers filing a joint return.
• They typically give about $10,000 to charity annually at the end of the year
• The SALT deduction, capped at $10,000, is the only other itemized deduction they can claim
• If they make their annual donation as usual, they will have only $20,000 of itemized deductions, which is less than the $24,000 standard deduction they are already entitled to claim.
• However, if they bunch or bundle together their 2018, 2019 and 2020 contributions in 2018, they will reduce their taxable income by $16,000 in 2018 and by $0 in 2019 and 2020.
A potential side effect of fewer taxpayers itemizing their deductions is that these taxpayers may choose to reduce or eliminate charitable contributions to not-for-profit organizations because their contributions will no longer reduce their personal income taxes. The Joint Committee on Taxation estimates that individuals will reduce charitable giving by $13 billion annually because their donations will no longer be tax deductible.
Charities like Discovering MErcy need your continued financial support and whether one calls this stocking stuffer idea bunching or bundling, it’s a win-win scenario for everyone!