Tree of money

Itemization Under the New Tax Law

by Rick Adkins, CFP®

Itemizing expenses on Schedule A has been common for many Americans. This is likely to change significantly under the new tax bill. The Standard Deduction has been raised to $12,000 for Single taxpayers and $24,000 for Married, Filing Jointly taxpayers. Since the 1980s, the principal “tax shelters” for most people have been Mortgage Interest, State and Local Taxes and Charitable Contributions.

To put this in context, consider a couple that has joint income of $250,000 and a $300,000 mortgage balance. Their itemized deductions would have been:

Charitable Contributions$25,000
Property Tax4,800
State Income Tax15,000
Mortgage Interest9,750
Itemized Deductions$54,550

Under the new tax bill, here’s what that might look like:

Charitable Contributions$25,000
State & Local Tax10,000
Mortgage Interest9,750
Itemized Deductions $44,750

For this couple, their benefit for itemizing is $20,750. Yet, for older clients who have paid down (or off) their mortgage, that number is minimal. For clients who don’t make this level of charitable contributions, they may no longer benefit from itemizing.

The Standard Deduction now works much like a Deductible on your Medical Insurance Policy.  In this case, until you exceed the Standard Deduction, the expense isn’t “deductible.” Here’s a technique that you may want to discuss with your advisor:

“Bunching” Charitable Contributions

The only one of the three areas of Itemized Deductions that you can control is Charitable Contributions.  So, if this imaginary couple above, “doubled up” in Year 1 and made no charitable gifts in Year 2, here’s what it would look like:

Year 1

Charitable Contributions$50,000
State & Local Tax10,000
Mortgage Interest9,750
Itemized Deductions $69,750

This would provide a deduction of $45,750 in excess of the Standard Deduction.

Year 2

Charitable Contributions$0
State & Local Tax10,000
Mortgage Interest9,750
Itemized Deductions $19,750

In this second year, the Itemized Deductions are less than the Standard Deduction, so they would be $5,250 better off taking the Standard Deduction. Over the two year period, this gives you $51,000 in “extra” deductions, versus $41,500.

If you are under age 70½, and you choose to bunch your contributions, you may ask, “How would I do that?” One way is to just double up your gifts to charities directly. Another method would be to deposit the Year 1 $50,000 into a Charitable Gift Fund. These instruments are available at Fidelity, Vanguard and many other firms. They are tax-exempt under 501(c)(3) so you can make the “bunched” gift into this account and then distribute the funds as you wish over the two-year period. You can automate the distributions so that your preferred charities receive the funds as you prefer. I like that you can name your account; pick your allocation, identify your charities and make the gifts from your tablet or cell phone.

Now for the really good part! You can fund your gift account using highly appreciated securities. Let’s say you have $50,000 in the Dow30 or S&P Mid Cap, but your basis is only $27,000. You would get the full $50,000 deduction, but you would avoid the capital gain of $23,000 on the security!

So this year, think about bunching your gifts to charities using a Charitable Gift fund, funded with highly appreciated securities!


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