Does it feel like Uncle Sam has his hand in your purse or pocket? Is he trying to extract from your wallet those last few Ben Franklins? Are you feeling a bit queasy about the size of the check you might have to write to the IRS come next April?
Well, friend, you've landed at the right spot. We're here to offer four ways to save taxes in 2019. But first a bit of background…
U.S. tax laws have long permitted taxpayers to reduce the income they pay taxes on by deducting certain expenses from taxable income. For example, the interest you pay on a mortgage has generally been a deductible expense. Property and state income or sales taxes has been another. So have charitable contributions, and medical expenses over a certain percentage of your income. If you've incurred such expenses in the past, you've likely been able to take them as "itemizable deductions." Such deductions reduce your taxable income if they add up to more than the "standard deduction."
The changes in the tax law passed in late 2017 significantly increased the standard deduction. New limits were also imposed on certain deductible expenses. Other previously deductible expenses have now been disallowed altogether. As a result, a large percentage of taxpayers now rely on the standard deduction rather than itemizing their deductible expenses.
The standard deduction for 2019 is $24,400 for those married filing jointly, and $12,200 for unmarried taxpayers. If you're 65 or older or blind, you get an extra $1,650 (single) or $1,300 (per person if filing married filing jointly).
If you give to charity, you may be especially affected. Unless the total of your gifts plus your other itemizable expenses adds up to more than your standard deduction, you're not getting any tax benefit from your generosity. What to do?
- One approach is to bunch your charitable contributions every other year or every third year.
Assume you and your spouse typically give $15,000 to charity each year, you're both over 65, and your other deductible expenses for 2019 only add up to $10,000. In that case, you won't get any tax benefit from your $15,000 charitable contribution. Your standard deduction of $27,000 is more than the sum of your itemizable deductions.
Make two or three years' worth of charitable contributions in 2019 (i.e., bunch them), and the sum of your itemizable deductions would exceed the standard deduction. You'd then get at least some of the tax benefit by reducing your taxable income by more than the standard deduction. In 2020 and 2021, you would use the standard deduction. Remind the recipients of your donations in 2019 that they've had the benefit of your contribution a year or two early.
- Is coming up with two or three years of cash donations problematic? Consider the benefit of donating appreciated securities (stocks or mutual funds) in-kind. You will avoid the capital gains taxes that would be incurred if you were to sell the position to raise cash. The receiving charity avoids paying capital gains when they liquidate the securities. Assuming you've held the position for more than a year, you generally get the full fair market value of the donation.
- Another strategy is to open a donor advised fund (DAF). You donate appreciated securities or cash to a charitable account in your name with a company such as Schwab Charitable. You get the full fair market value deduction for your contribution in the year that you make the donation. The charitable program then invests the proceeds for you (typically at your direction). Over time, you make recommendations on which charities you want the funds to go to. You can bunch your charitable giving into one year for the tax benefit, and then parcel out your charitable giving over future years. Unfortunately, you do not get another deduction when you gift from the DAF to the charity, as you received the deduction in the year the donation was made to the DAF. For more details about DAFs, check out Schwab Charitable.
- Finally, the concept of bunching deductions may apply to other itemizable expenses. These could include mortgage interest payments (make that January payment in late December), or medical expenses in excess of certain limits. Property and state income or sales taxes may also be bunched, although the limit for property taxes and state sales or income tax payments is $10,000 for single individuals and married filing jointly.
We won't take credit in this blog, but we'll also remind you that if you're 70-1/2 or older and taking Required Minimum Distributions from an IRA, you can cut your taxes by having up to $100,000 sent from your IRA to an eligible charity. It's called a Qualified Charitable Distribution (QCD) and our blog about QCDs can be accessed by clicking here.
An earlier version of this blog appeared on our website on November 30, 2018. This version has been updated for 2019 values. We recommend you consult with your tax professional to determine how any of these ideas might work in your particular case. And while we don't offer tax or legal advice, we're available to discuss and educate clients about smart investing and tax-conscious financial planning.