With tax laws in flux for wealthy clients, the powerful deduction tool of charitable contributions needs the right timing more than ever. Should such deductions, for instance, get bumped into next year for maximum tax benefit?
“Delaying gifts to 2022 may make sense for some taxpayers,” said Joan Crain, global wealth strategist at BNY Mellon Wealth Management in Fort Lauderdale, Fla. “If you anticipate being in a higher tax bracket next year, it may make sense to make large gifts next year, when the tax offset is greater.”
Due to today’s larger standard deduction ($25,100 for married couples filing jointly in 2021) and the $10,000 cap on the state and local tax deduction, “bunching large gifts to alternating years may allow a donor to take advantage of itemizing deductions and getting a greater benefit than with the standard deduction,” Crain said. “Since the latter was increased significantly with 2017 tax reform, moderate charitable donations may not offer any break, as the donors may end up unable to itemize. By only making these gifts every second or third year, a taxpayer could make larger gifts in the gifting year, exceeding the [standard deduction] threshold.”
“Such a strategy works well in a high-income tax year where the taxpayer is in a higher marginal tax bracket,” added Bruce Benjamin, shareholder with Drucker & Scaccetti in Philadelphia.
Deferring donations has been a hot topic with clients this year, “when everyone thought that individual tax and capital gains rates would be increased in 2022,” said Tim Laffey, head of tax policy and research at Rockefeller Capital Management in Philadelphia. “It appears individual rates and capital gains rates won’t increase for 2022. Deferring the donation may not make as much sense unless the taxpayers will have an abnormally high-income tax year in the future and they plan to bunch charitable contributions in that year.”
The latest proposed surtaxes for high income taxpayers, he added, depend on a threshold based on modified adjusted gross income, which is determined before taking into account itemized deductions.
“Bunching techniques used to be only used by retirees because they were likely to have paid off their mortgage and had more leeway in claiming the standard deduction every other year. Since the [tax reform], almost all taxpayers can benefit from bunching,” added Mary Kay Foss, a CPA in Walnut Creek, Calif.
There’s one key caveat regarding postponing charitable gifts from 2021 to 2022.
“The ability to offset up to 100% of a donor’s income with cash gifts to charities is a Covid-inspired tax break that won’t be available after Dec. 31 unless there’s a last-minute extension, which hasn’t been proposed,” Crain said. “So, for those with very large lump-sum income spikes in 2021, this may be a key motivator to make a large cash gift this year.”
Published limitations for charitable giving tend to stick in clients’ minds—whether correct or not.