TL;DR Just how good is doubling up itemized contributions in 2018, using that to meet minimum spend for credit card bonuses, and taking the standard deduction in 2019?
With the US tax code changes in 2017 (elimination of the individual exemption, and corresponding increase in standard deduction), it's no longer accurate to think of charitable contributions as being 100% deductible, since a large fraction of the the itemized deduction is wasted simply in reaching the standard deduction. (Particularly if you rent and don't have mortgage-interest deductions to itemize)
A strategy is known to reduce this effect -- alternating between years of high charitable contributions (and itemizing deductions) and low contributions (and taking the standard deduction). If you have the cash lying around, a donor-advised charitable trust can be used. But what if you don't want to liquidate those funds (paying penalties for early CD redemption, or wasting investment losses with no capital gains to cancel in the year)?
It seems like opening a credit card with a promotional APR is the thing to do. In my experience, charitable gifts count as purchases, so there are no cash advance or balance transfer fees associated with stacking them up. I have basically the entire 12 months of 2019 during which I would ordinarily make these charitable gifts, to pay off the cards.
- I get to concentrate the full charitable contributions into 2018 -- since I'm already above the threshold for itemizing, accelerated contributions will result in one-for-one decrease in taxable income: Effect = save 22-24%
- I earn rewards on the "purchase price", which basically cancel out the processing fees the charity has to pay: Effect = cost 0.5%
- I rapidly meet spending requirements for bonuses, worth up to 10% as much as the spending requirement. And since these are rebates on the amount spent, they are not taxable: Effect = save 8-10%
Altogether this looks like I gain back roughly 30% of the standard deduction for 2019 (less other things I would itemize).
Of course, there are several pitfalls of promotional APR credit cards:
- Must make all the minimum monthly payments
- Things get complicated if new purchases are made before the promo APR ends
- Must pay off the account before the promo APR ends (and track when each ends)
- Credit cards that report usage to credit bureaus will cause my utilization to go up, which would reduce my credit score (but some cards only report negative items, not balances)
Since I do have sufficient savings to cover the proposed gifts, I'm not risking default even if my income isn't as predictable during 2019 as I expect. And I won't use these cards for anything else, at least until the initial balances are totally paid off.
Several other negative aspects:
- Hard pulls to apply for the cards are unavoidable
- I might have waited too long already, to get 2-3 new cards approved and in my hands before the end of the year
- Next time around (end of 2020) the banks might tell me I'm ineligible for signup bonuses, although I think there are enough non-bonused offers to do the promo APR thing for three cycles before trying to reopen any of the same cards.
Is this analysis correct or have I missed something critical?
(This page mentions that deductions of some charitable contributions are limited at 30% of AGI. I might be getting close to that by doubling up, can someone explain when the limit is 30% and when 50%?)