Tax reform, if passed, will provide a limited window in which to take advantage of the old rules and maximize deductions. In light of the proposed reform, we want to highlight a few key strategies to consider as we approach year-end. However, it is important to note that every client situation is unique, and you should consult a tax advisor before making a change.
Maximizing Year-End Charitable Gifts
The charitable giving deduction will likely survive tax reform, given that both the House and Senate versions of the evolving bill left it in place. However, taking the deduction may become significantly less attractive in 2018 and beyond if reform passes, so if you are considering a significant philanthropic donation, you may wish to accelerate it into 2017.
A bigger standard deduction reduces the value of itemizing
That is because the standard deduction will nearly double under the new tax bill to $24,000 per married couple (and $12,000 for individuals or people who are married but filing separately). As a result, taxpayers will need to have significantly more in deductions to make itemizing worthwhile — and that will become more difficult since several of the most common itemized deductions including state and local taxes and mortgage interest will likely be either limited or eliminated.
Tax reform, if passed, will take effect January 1, 2018, so taxpayers have a brief window in which to take advantage of the old rules and maximize their deductions. For some high earning individuals and families, it may make sense to accelerate 2018 contributions into 2017, ensuring that they get the full benefit of the charitable deduction, coupled with any other deductions that may be available for state and local taxes and mortgage interest.
Strategies for 2018 and beyond
Once the new rules are in place, next year, other strategies may become appropriate. If you have given an annual gift to charity up to now, it may make sense to bunch two or more years’ worth of donations into a single reporting period, so that your itemized deductions exceed the standard deduction.
Donors may also wish to consider giving highly appreciated securities to charity in 2018 and beyond, since the tax reform bill currently under discussion changes the way that cost basis is calculated. Under the old rules, security owners could determine which specific securities to sell, allowing them to control how much they realized in capital gains. The new rules specify that the oldest securities must be sold first, in a first-in-first-out rule intended to increase government revenues from capital gains taxes. Under the existing law, by giving securities to charity, donors can get rid of their lowest cost basis investments, while benefiting from a charitable deduction.
Remember that you can only take charitable deductions of up to 50% of AGI for gifts to most qualified charities, and only 30% of income for gifts that have embedded capital gains. Also, itemized deductions, including charitable gifts, phase out at higher incomes: $320,000 if married filing a joint return, $266,700 if filing as single, $293,350 if filing as head of household, or $160,000 if married filing a separate return. Since these rules are complex, you should talk to your tax advisor about the specific details of your own situation.