Multi-year Tax Planning

According to estimates, there will be 29 million more taxpayers using the standard deduction for the 2018 tax year than did in 2017. Usually, one who is relying on the standard deduction, can get away with fairly minimal tax planning—maximize contributions to qualified retirement plans, offset capital gains with capital losses, and so on.

However, some taxpayers will profit by alternating between itemizing and taking the standard deduction. Here’s an example of how that works:

Sam and Janet pay $12,000 in state and local property taxes each year and they give $10,000 each year to charity. That gave them $22,000 of deductions for 2017. But in 2018 their standard deduction will be $24,000 and their state and local tax deduction will be capped at $10,000, so they won’t need to itemize. They might never need to itemize again, unless their charitable giving grows dramatically.

What this couple should consider is accelerating their 2019 $10,000 charitable gift into this tax year. That will give them a deduction of $30,000 for 2018. Next year, they can take the $24,400 standard deduction (there’s been an inflation adjustment for 2019) even though they don’t make any charitable gift. Over the two years their tax deductions will come to $54,400, compared to $48,400 if they simply rely on the standard deduction every year.

Speaking of gifts, the annual exclusion from federal gift tax is $15,000 per person this year. It’s a use it or lose it proposition, there’s no carryover of unused annual exclusion amounts. Married taxpayers may use “gift splitting” and so give $30,000 to each of as many children and grandchildren as they like.