Would the “Double-Up” Strategy Benefit Your 2019 Tax Deductions?
As the end of the year approaches, many people are in a tax planning mode. Likewise, we help our clients facilitate Roth conversions, charitable contributions, required minimum distributions, tax payments, along with other tax and wealth management maneuvers.
After the passage of the Tax Cut and Jobs Act, one question we suggest many of our clients ask is: “what is the “double-up” strategy for tax deductions, and should I use it?”
The strategy has been around for many years and essentially involves comparing your list of tax deductions for things like property tax, sales tax, and charitable contributions to the “standard” deduction.
If your itemized deductions are greater than the standard deduction, you should use the total of your itemized list. Conversely, if your itemized deductions are less than the standard deduction, you should take the standard deduction. In either case, your taxable income is lowered, resulting in a smaller tax bill.
The idea of implementing a double-up strategy now is more topical for one simple reason. Before 2018, the standard deduction was relatively low at $12,700 for a married couple and $6,350 for a single filer. Most people who own property had itemized deductions that exceeded these standard amounts.
Now, however, the standard deductions are $24,400 for married filers and $12,200 for single people making it much more difficult to clear the threshold for itemized deductions. These increases make 2019 a good year to consider the “double-up” strategy.
Most tax deductions occur in the year of a tax event. Over time you’ll pay sales taxes, make charitable contributions, or pay property taxes. However, it is possible to shift some of these events between tax years, allowing you to trade off taking the standard deduction one year and itemized deductions the next. To better illustrate the benefits, let’s look at an example.
In Texas, the deadline for paying property taxes is typically January 31st. Most people receive their bills in December and assume they are due at the end of the month, or simply pay it upon receipt without consideration of the due date. For this example, let’s say you pay your 2019 tax bill in January of 2020, and then pay the 2020 tax bill before the end of next year. The result is two property tax payments in one tax year (2020) and results in the “doubling-up” part of the strategy. In this example, you would likely want to take the standard deduction for your 2019 taxes but take the itemized deductions for 2020.
A similar consideration can be made with charitable contributions. Using a Donor Advised Fund, it is possible to make two years’ worth of donations at the same time. The tax deduction is received in the year in which you transfer funds to the Donor Advised Fund. However, you can make grants to charities from the DAF on any schedule, allowing you to provide consistent cash flow to your favorite church or other non-profit organization.
While the Tax Cuts and Jobs Act limits the state and local tax deduction to $10,000 (even when doubling up), you can still use it in tandem with smart charitable donations. Also, if you have more significant medical bills in a specific year, consider using that as a year for extra deductible expenses, such as making your January mortgage (or student loan) payment in December, so your 1098 reflects 13 months of interest instead of 12.
Please contact your advisor or tax professional to determine whether incorporating the “double-up” strategy is a good approach for you for 2019 taxes.