Bunches of tax deductions
Good morning!
If you noticed this week's subject line above, it's about taxes.
As a result, I have to tell you that I'm not a CPA or accountant and nothing that follows is tax advice. You know the drill...
Now that we have that out of the way, I wanted to share a tax planning strategy with you.
It's generally referred to as "bunching."
Let me give you an example:
Jane Doe is in her late 50s and divorced. She files her taxes as a single taxpayer.
Between Jane's little bit of remaining mortgage interest, her annual gifts to her church and other charities, and her other deductions, her Schedule A total itemized deductions are $10,500.
However, since the 2021 standard deduction for single filers is $12,550, and since her total itemized deductions are less than this standard deduction amount, she would just use the standard deduction since it's the higher number and it will save her more on her taxes.
But what if, instead of making her $3,000 annual charitable contributions to her church and other organizations, she instead "bunches" 5 years worth of annual charitable deductions into a single tax year?
Now she'd be making a $15,000 charitable contribution in addition to her other itemized deductions. This would get her well above the standard deduction for 2021 which would result in greater tax savings.
Assuming her other itemized deductions from our earlier example stay the same, she could itemize $22,500 this year. [Total itemized deductions of $10,500 - $3,000 + $15,000 = $22,500}
And for the next 4 years, she could still take the standard deduction while not making her annual charitable contributions.
The total tax savings over the 5 years would be higher than her just continuing to take the standard deduction every year.
For more on this concept with an example, see this article from Schwab Charitable.
Naturally, this strategy only works if you have enough liquidity and it doesn't jeopardize your cashflow or longer-term planning.
And, in case you don't want to give a lump-sum donation to your charity of choice, you can setup a Donor Advised Fund to capture your charitable donation and you retain control of when the funds are given to which charities and in what amounts.
For more on Donor Advised Funds, here's a pretty good overview article from Morningstar.
Of course, not every tax planning strategy makes sense for everyone, so consult your tax advisor or let me know if you'd like to discuss any of this further.
Listen Up Y'all
Check out my latest podcast episode with Paulette Rigo of Better Divorce Academy.
Paulette is an Atlanta-area divorce coach who helps women "divorce with dignity."
And in our conversation, she shares a little about her own divorce which took years to resolve.
I think it's another interesting conversation with an interesting person. But give it a listen and let me know what YOU think.
Scallops Anyone?
By the time you're reading this, Elizabeth and I will have gone to Florida and back for a long weekend.
We're going down to the Clearwater area to go scalloping with some friends.
We went last summer for the first time and had a blast, so we're going to see if we can help fill up some 5-gallon buckets with scallops again this season.
I'll hopefully have a picture or two to share with you from our trip soon.
For now, have a great rest of your week!
Thank you, as always, for reading.
Until next Wednesday,
Russ