Most taxpayers probably have mortgage interest as their primary Schedule A deduction, but for taxpayers whose Schedule A deduction is primarily a result of charitable contributions from annual tithing, only the portion of giving that exceeds the standard deduction amount is actually earning a deduction. To offset high 2010 taxes that would result from a Roth conversion, think about donating several years of tithing "in advance" to a local community foundation as a pass-through donor account, which could be available over the next few years to use in funding annual tithing commitments.
In 2011 and subsequent years, with no charitable contributions on the Schedule A, the taxpayer would utilize the standard deduction. However, over the course of next few years, the taxpayer would have the benefit of the full standardized deduction as well as all of the charitable deduction by lumping the deduction together in 2010, the year that it can be fully utilized to offset high marginal rate Roth conversion income.
Introduce yourself to your local community foundation before attempting this because community foundations prefer to create endowment accounts, which have a much longer lifespan. However, large tax problems translate into large pass-through accounts, so foundations are likely to make the decision on whether to accept the donation on a case-by-case basis. Keep in mind, also, that this large 2010 donation is irrevocable. For some individuals, however, this strategy might be worth adding to your tax toolbox.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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