Generous givers don’t normally make charitable decisions based primarily on the tax benefit. But changes to the tax law in 2017 created some interesting opportunities to explore new strategies. One such opportunity is to front-load charitable gifts for one or more years.

Changes for 2018

Let’s first set the stage. For 2018, the new law limits both the state and local tax deduction and the mortgage interest deduction:

  • The deduction for state and local taxes is capped at $10,000, and
  • Mortgage interest is deductible on only the first $750,000 of debt.

At the same time, the standard deduction is nearly doubling. In 2018, the standard deduction rises from $12,700 to $24,000 for married couples filing jointly, and from $6,350 to $12,000 for un-married individuals. As a result, fewer people will itemize, and instead opt for the standard deduction. A couple whose state & local taxes and mortgage interest add up to $20,000, would not itemize unless their charitable gifts will be at least $4,000.

Give Two (or More) Years of Gifts Now

Here’s where front-loading charitable gifts might make sense. If the couple above plans to give $3,000 to charity each year over the next two, they could give $6,000 now for both years, and itemize their deduction. Because the standard deduction acts like a floor in each year, they can’t do worse than to deduct $24,000 in a year. So, they would itemize $26,000 this year, and go back to the $24,000 standard deduction the following year. This way, their two year deduction total would be $50,000 vs. $48,000.

Front-loading makes sense with cash gifts, but it’s even smarter when giving appreciated assets, like shares of stock or mutual funds, because you avoid paying a tax on the capital gain. Does deciding which charities should receive two years’ worth of your gifts right now sound daunting? Establishing a donor advised fund might  be a useful way to separate calendar year tax planning from when to distribute the funds.

If exploring this strategy sounds interesting, consult your tax advisor or contact Peloton.