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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%?)

  • Ironically, when I opened your link, the first ad was for a WFC credit card with a bonus :->) – Bob Baerker Dec 10 '18 at 12:50
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    "With the US tax code changes in 2017 ... it's no longer accurate to think of charitable contributions as being 100% deductible," it never was accurate to think that way. There has been a "standard deduction" for as long as I've been paying taxes. The standard deduction is larger now, so the issue is magnified, but it's not a new issue. – Jay Dec 10 '18 at 21:55
  • @Jay: The standard deduction used to be approximately what a typical adult would reach through itemization, excluding charitable contributions, because the personal exemption could be taken when itemizing. Removal of the personal exemption and expansion of the standard deduction greatly changed that equation. – Ben Voigt Dec 10 '18 at 22:15
  • @BenVoigt It's surely true that some people have other (besides charitable contributions) itemized deductions that totaled more than the old standard deduction, but less than the new standard deduction. If that's the case for you, then yes, this change in tax law could have the effect you discuss. But, I don't have any statistics but I seriously question if most people find themselves in that situation. Many would find their total deductions including charitable contributions less than the old standard deduction. Some would find their non-charitable deductions more than the new, higher ... – Jay Dec 11 '18 at 20:54
  • ... standard deduction. I'd expect to find a wide range of total deduction amounts. Personally, I live in an area where housing prices are pretty low so I don't pay a lot in mortgage interest (let's see, $2000-$2500) or property taxes (about $1500) compared to some, so I think it's likely that even with charitable contributions, my deductions this year will be less than the married-filing-jointly standard deduction, or so close that it will make little difference. – Jay Dec 11 '18 at 21:00
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This is really two separate decisions: how much to donate, and how much to spend on credit cards. The benefit of the credit card promotions and bonuses would be the same whether you charge donations or something else, as long as it's an amount you were going to spend anyway. If the donations are the major part of your planned chargeable spending, then your plan could make sense.

But you should decide whether you want to play the credit card bonus game in the first place; the charitable nature of the spending has no effect on that decision.

Incidentally, investment losses without offsetting gains are not "wasted" but are deducted up to $3000 and the remainder carried forward to future years.

  • The charitable nature of the spending comes into play only insofar that the timing is determined by the tax year as well as the time window the issuer allows. You're right that if I don't care for the bonus game, I could/should minimize the number of cards, rather than maximize the number of bonuses -- depending on the credit limit each card makes available for the promotional 0% APR. – Ben Voigt Dec 10 '18 at 5:52
  • +1 for the first sentence. – Pete B. Dec 10 '18 at 13:53
  • I suppose it may be relevant that it's easier to time-shift charitable giving than many other categories of expense. Presumably you can't tell the electric company, "I've decided not to pay my electric bills this year, but don't worry, I'll pay double next year." But nanoman's basic point is still correct: you can get a tax benefit by bunching charitable contributions regardless of the credit card bonus scheme, and you can benefit from the credit card bonus scheme regardless of whether you use it for charitable contributions or other sorts of expenses. – Jay Dec 12 '18 at 19:49

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