Mature Couple in Meeting with Advisor

Tax reform favors the standard deduction over individual exemptions and itemized deductions. But some taxpayers may not have to settle for reduced tax benefits.

Tax strategies

Deduction Stacking + Donor Advised Funds = Potential Tax Savings

  • Craig J. Ruffolo
  • Stephanie Petri
  • 9/24/2018

The Tax Cuts and Jobs Act of 2017 (TCJA) created a new framework for families and individuals to consider when it comes to tax deductions. As a result, some taxpayers may have the opportunity to employ a strategy that involves “stacking” deductions and supporting their favorite charities while benefiting from potential tax savings.

Claiming deductions used to be fairly straightforward

Prior to the tax reform law, several common deductions could be combined with no limit (or very high limits), resulting in a total deduction greater than the combined standard deduction and individual exemption. A married couple with the following activities would likely have found itemizing their deductions slightly more appealing than taking the combined standard deduction and individual exemption.

  • $5,500 of state income taxes paid
  • $5,500 of real estate taxes paid
  • $10,000 in cash charitable contributions

Before the new law took effect, the combined standard deduction ($12,700) and personal exemption ($4,050 each) for this couple would have been $20,800 ($12,700 + ($4,050 X 2)). The itemized deduction for state income taxes, real estate taxes, and charitable contributions would be $21,000, making it worthwhile to itemize.

Tax reform made the standard deduction more attractive

Under the TCJA, the combined deduction of state income taxes paid and real estate taxes paid is limited to $10,000, while the maximum deduction for cash charitable contributions was increased to 60 percent of adjusted gross income. Now this same family would likely choose the new standard deduction of $24,000 allowed for those married filing jointly rather than the limited itemized option of $20,000 of deductions listed.

However, if these expenses represent a consistent pattern year-to-year, some families may be able increase their deductions by 12 percent or more, depending on the level of their typical charitable contributions. This can be accomplished if there is the flexibility to adjust their tax rhythm and the capacity to employ a wealth advisory resource called a donor-advised fund (DAF).

Here’s how deduction stacking works

If the family described above has the capacity to stack deductions and fund two years of its typical charitable giving in one tax year, it may be possible to choose the higher allowed deduction in alternating years. Here’s an example:

Itemized Deductions Allowed Without Deduction Stacking
Limited
State Income and
Real Estate Taxes
Charitable
Contributions
Allowed
Itemized
Deductions
Standard
Deduction
Year 1 $10,000 $10,000 $20,000 $24,000
Year 2 $10,000 $10,000 $20,000 $24,000
TOTAL deductions over two years ($24,000 x 2) $48,000

 

Itemized Deductions Allowed With Deduction Stacking
Limited
State Income and
Real Estate Taxes
Charitable
Contributions
Allowed
Itemized
Deductions
Standard
Deduction
Year 1 $10,000 $20,000 $30,000 $24,000
Year 2 $10,000 $0 $10,000 $24,000
TOTAL deductions over two years ($30,000 + $24,000) $54,000

For those who choose this strategy, there may be a concern about the impact on the charities they support when they make a sizable contribution one year and none the next. With a traditional approach to giving, this could be an issue, but a DAF can help manage those concerns.

Now add the benefits of a donor-advised fund

Donor-advised funds are charitable accounts that provide a tax deduction in the year where any contributions are made, but the donor can distribute the funds out over time. While the funds sit in the account, they can be invested for preservation or for growth. If the funds do grow, there is more available for charitable causes. Some other advantages offered by a DAF include:

  • You can build a fund to sustain a lifestyle of giving in retirement.
  • One receipt for annual tax purposes, no matter how many grants are made throughout the year.
  • The option to automate regular gifts on different cycles.
  • The option to give anonymously to charities and limit the number of requests you receive.

Every DAF sponsor has its own minimums, but the accounts are typically easy to open, often with an initial contribution as low as $5,000. Optional future contributions can often be as small as $500, and grants out of the fund as low as $50.

How we can help

Some may not have the means to make the large first-year charitable contribution required for this strategy, but most taxpayers can benefit when their tax and wealth advisory professionals work together to deliver coordinated advice. At your direction, all of CLA’s professionals are ready to help you find out if this and other opportunities can help you make the most of the tax reform laws.

  • Craig J. Ruffolo
  • Senior Wealth Advisor
  • CLA Peoria
  • CliftonLarsonAllen Wealth Advisors, LLC