Tax reform means you have to rethink and retool your tax return. One possibly tax savings opportunity could be holding your 2018 charitable contributions and medical bills until 2019.
The passage last year of the Tax Cuts and Jobs Act has led to uncharted territory for many tax planning issues. Among those issues is charitable donations. Many charities feared that the lack of tax benefits many Americans would see from such donations would lead to a decrease in funds for the charities themselves. This is because the doubling of the standard deduction will lead many taxpayers to use the standard deduction instead of itemizing their deductions like in years past. If the taxpayer doesn’t itemize, they receive no benefit from their charitable giving.
While this will undoubtedly lead some taxpayers to skip their annual donations, the ones who continue to give can maximize their chances of receiving a benefit by using the strategy of bundling their donations into a single year. By making their annual donation for 2018 in the first week of 2019 and then making their donation for 2019 in the last week of 2019 they will essentially be bundling two years’ worth of donations into a single tax year and therefore maximize the chances of receiving a tax benefit.
This same strategy can be utilized for other itemized deductions that have not been phased out in the new tax law, such as medical expenses. If the taxpayer is looking at significant medical bills as the year ends, they could see a tax savings in 2019 by paying those bills early in the new year and then paying the subsequent bills by 2019 year end. A Taxpayer may also be able to time certain elective procedures so that they occur in a more tax advantageous way. By bundling these costs into a single year, they can significantly raise the chances of exceeding the 7.5% of Adjusted Gross Income threshold over which medical costs can be deducted.
As a hedge at the end of next year, the taxpayer can also have their tax professional run an estimated return. If there will be no benefit based on the estimate, the taxpayer can then make their next charitable donation or pay their medical bills in the following year and continue to use this tactic every year until it pays off. Of course, other itemized deductions like real estate taxes and mortgage interest need to be considered when making a timing decision.
While this strategy does not guarantee that the taxpayer will save money on their tax bill, not using the strategies outlined above will significantly reduce the odds of tax savings. The new standard deduction of $12,000 for single filers and $24,000 for joint filers is a high bar for most taxpayers to exceed. According to the people who wrote the Tax Cuts and Jobs Act, this is by design to simplify most Americans’ tax returns. However, there is no downside to using this strategy for the taxpayer and only upside if you do exceed the threshold so it doesn’t hurt to try it out.
For more information or help with year-end tax planning, call one of our professionals at Alloy Silverstein.
Author: Matthew McCarthy
Empowering business owners and individuals in South Jersey and Philadelphia to feel confident through proactive accounting and advisory solutions.
