I’ve heard numerous people suggest that itemizing deductions under the new tax law is no longer beneficial. For some that is true. For others however, strategies exist to help you keep more of your hard-earned money.
The tax laws enacted for 2018 fundamentally changed how our tax system works for individuals. Gone is the notion of an exemption for each dependent and instead there is the potential for a tax credit of varying amounts for certain dependents. Along with that the standard deduction amounts were raised significantly so that everyone can benefit from more tax-free income without the burden of tracking itemized deductions. However, just as in the past, it is still beneficial to take the higher of the standard or itemized deductions.
One problem we see all too often is that itemized deductions under the new tax laws are just slightly less than the given standard deduction. The good news here is that a simple timing strategy might be enough to overcome this problem. For instance, let’s look at a married couple with a standard deduction of $24,000 and calculated itemized deductions of $22,500. Let’s also assume that the itemized deduction total includes $8,000 of charitable contributions. In the current scenario there would be no tax benefit to any of the charitable contributions since the standard deduction is larger.
If that same couple would use a tool called a donor advised charitable fund, they could affect the timing of their charitable contributions to group their deductions into alternating years. Assuming they would contribute an additional $5,000 of their charitable contributions one year to this fund instead of giving directly to the charities, the grouped deduction would exceed their standard deduction limit by $3,500. With a federal tax rate of 24%, that move alone would generate $840 in tax savings simply by controlling the timing of the deduction. Over the course of two years, the amount given as charitable is identical. Only the timing changed. Similar things can be done with deductible taxes and mortgage interest although practical limitations apply to these.