How are we reacting to the new Republican tax law?
Well, I’ve crunched the numbers and my partner and I will be around $3-4k short of the new standard deduction, not including charitable contributions. This gap will widen over time as we pay down our mortgage and our interest deduction declines.
Since we plan to continue donating 10% of our net income, we can pretty easily surpass this $3-4k gap each year if we give as normal. But it would be more tax efficient to bunch our giving so that we give the same amount on average, but only every other year. Applying such a strategy would net us an average of $385 in greater tax refunds every year (growing slightly over time). Not a life changing amount, but not chump change either.
The big downside to such a plan is that we would, in essence, be “delaying” charitable donations which could be well used by our favorite institutions sooner than later. I put a pretty high discount rate on donations– I think $50 to a cause today is worth way more than $50 to a cause a year from now. Because who knows what the world will look like a year from now. Plus, if we lived our whole lives around financial optimization, we wouldn’t be giving this much to begin with.
Alternatively, we could “prepay” charitable donations a year early. Which, if you believe the stock market will continue its bonanza of 20% annual increases, means we’ll be missing on non-trivial market gains.
So where does that leave us? To bunch or not to bunch?
Since we “prepaid” a lot of our charitable obligation for this year, I am inclined to donate the remainder of this year’s charitable obligation and then “prepay” next year’s obligations into a donor advised fund. From an efficient giving standpoint, I still think it is better to just donate the extra to charity now and eschew the DAF altogether. But from a mental accounting standpoint, having the money under my “advisement” (read: basically under my control except legally?) is strangely comforting. Plus, setting up a charitable foundation in anticipation for our wedding might be nice. Have our guests donate into our charitable pot rather than buying us a toaster oven we’ll never use.
Are you changing your tax strategy due to the new tax law? Will it affect your charitable giving?