My suggestions — please note they're suggestions, not advice — come in two forms. One is a simple strategy that I'm going to adopt and that could work for you if, like me, you're more than 70 years old and are taking so-called required minimum distributions from retirement accounts.
The second strategy, which is more complicated, is something you might want to consider if you're younger than 70 and have enough financial and tax-advisory resources to see if setting up a donor-advised fund — of which more later — would work for you.
Here we go.
There's a relatively simple strategy that could work for those of you who happen to be old enough (more than 70½) and financially fortunate enough to be required to take sizable distributions from your retirement accounts.
It goes like this. You have some of your retirement distributions — up to a maximum of $100,000 a year — diverted to charities instead of coming to you.
Here's why I'm planning to do this. For 2016, my wife and I took a bit more than $30,000 of state and local tax deductions — we live in New Jersey, a high-cost, high-tax state. The only itemized deductions we took were for those SALT (state and local tax) payments and for charitable contributions. The same will probably be true for 2017.
But in 2018, we can get an indirect federal tax deduction by making charitable contributions out of my retirement distributions — and we will still be able to take the new standard deduction of $24,000 for a married couple ($26,600 for my wife and me because we're both over 65).
So I plan to have Vanguard, which holds my major retirement accounts, make out some checks to specific charities instead of to me.
I don't like the prospect of the paperwork this will create — but I like the way it will lower our federal tax bill. It's the functional equivalent of deducting the contributions.
By the way, this doesn't remotely resemble tax-dodging. It's a well-known, mainstream strategy that's pushed by investment houses.
But what if you're not old enough — or fortunate enough — to get required retirement distributions? Let's look at donor-advised funds, which I'd never paid much attention to before researching this column.
They seem easy to set up online — especially if you open them at a place where you already have an account. You can put money into your donor fund by writing a check or contributing securities or other assets, including (in some cases) bitcoin or real estate.
And get this: If you contribute stocks, mutual fund shares or other assets that are worth more than they cost you, you get a deduction for their full value without having to pay tax on the gain.
The assets you contribute are deductible for the year in which you put them in. But the contributions your fund makes aren't tax-deductible.
Using donor funds is more complicated than diverting retirement payments to charities, and you generally have to pay annual fees to the entity that administers your fund.
The minimum required to start at the three donor-advised funds I looked at are $5,000 for Fidelity and Schwab, $25,000 for Vanguard. And, of course, you pay the normal fees and costs if your donor fund assets are in mutual fund shares.
You've got to plan the timing and amount of your donor-fund contribution properly to maximize the value of the deduction that you can get. So you'd probably want to put in several years worth of planned contributions at one time. Unless you happen to be a tax maven, you ought to get advice on how much to put in and when to do it.
Even diverting retirement distributions or setting up a donor fund may not totally offset the loss you're suffering because you can no longer deduct all of your state and local taxes. But at least in my case, diverting retirement payments is better financially than writing checks to charities and taking the standard deduction. And who knows? One of these strategies might help cut your federal tax payments, too.
Two final things:
1. You can't double-dip by using retirement distributions to fund a donor-advised fund. Sorry about that.
2. Before you adopt either of the strategies I discuss in this column, make sure that they will work in your particular situation. Make sure to check them out thoroughly. Please remember that I'm a business journalist who occasionally writes about taxes; I'm not a tax professional.