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To bunch, or not to bunch, that is the question

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  • To bunch, or not to bunch, that is the question

    Okay all of you quants and tax gurus, what is the value for me of taking the standard deduction every other year, and bunching charitable donations every other year?  Is this worth it?
    Situation:

    - taxable income: around $480k/year (after retirement contributions)

    - charity ~$50k/year

    - state taxes ~$24k/year

    - Mortgage interest ~$17k/year

    - going forward (2018 and beyond), I will have the max $10k/year of state and local taxes


    If my annual charitable donations are the same every year, I expect to be in the 35% bracket going forward.


    If I double up/bunch charity every other year, and take the standard deduction every other year it looks like this:


    on years with standard deduction (no charity):

    - max bracket will still be 35% (with new 2018 rates)

    - I will not qualify for the child tax credit (3 children)


    on years when I itemize (with 2x charity)

    - max bracket will probably be 32%

    - I will qualify for child tax credit


    Some considerations:

    - value of standard deduction: $24k X 35% = $8,400

    - value of child tax credit: $2k x3 children = $6,000

    - donations become slightly less valuable (for taxes only) if my marginal tax rate goes from 35% to 32% ($300 less valuable for every $10k).

    - We donate using appreciated shares of TSM/TISM from taxable account.  This requires some assumptions, but if the long term nominal return was 6%, then donating $50k now instead of one year from now has an opportunity cost of $50k x 6% = $3k


    Are there other considerations that I am not thinking about?


    Two questions:


    1.  To bunch, or not to bunch: how much would this really save me?  I kind of like doing the same thing every year.  Is this worth the hassle?


    2.  If the answer to number one is that bunching is worth it, then the question becomes how best to proceed going forward?


    Option #1: bunch in 2017 (only a few days left), standard deduction in 2018, bunch 2019, ...

    Option #2: no change in 2017, bunch in 2018, standard deduction in 2019, ...

    Option #3: no change in 2017, standard deduction in 2018, bunch 2019, ...


    Thoughts?

  • #2
    You get the standard deduction every year for “free”, so you’d need to have an existing charitable intent greater than twice the new, higher standard deduction in order to profit from this strategy.

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    • #3
      If I were you I don't think I'd bunch until I paid off the mortgage. But I would probably prepay my 2018 property taxes and make sure I paid my 2017 state taxes before 12/31. I might even prepay some charity in 2018.

      But my situation is all I've got is $10K in taxes + charity (which is easily bunched.)
      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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