Recently, the House and the Senate passed bills that could create major changes to our current tax laws. They are now working to reconcile the bills, with the goal of having the legislation signed by December 25. If legislation is passed, 2017 will be the last year for many taxpayers to enjoy deductions for many things, including charitable gifts. Due to the proposed changes to the standard deduction, the Joint Committee on Taxation estimates that the number of taxpayers who will itemize their deductions in the year 2018 (and thereby get tax savings from charitable gifts) will fall from 40 million under the current law to just 9 million under the new legislation.
For taxpayers who currently itemize their tax deductions (instead of taking the standard deduction), there are a few year-end tax strategies described here to keep in mind.
What Is Happening to Charitable Gifts?
If the proposed law is enacted, things will change dramatically in 2018. Both the House and Senate bills propose eliminating virtually every itemized deduction, except for home mortgage interest, charitable gifts, and up to $10,000 of property tax. Most significantly, taxpayers will no longer be able to deduct their state and local income taxes.
Additionally, both the House and the Senate bills propose raising the standard deduction to $24,000 for married couples and $12,000 for unmarried individuals. The impact on those who do not pay enough mortgage interest or property tax is that in future years, they now will not get any tax savings from the first $24,000/$12,000 that they donate to charities each year. Instead, they will take the $24,000/$12,000 standard deduction.
What 2017 Year-End Tax Strategies Should I Consider?
First, it is important to note that this law has not yet been enacted and there is uncertainty over whether Congress will indeed make these tax changes. While most believe it is more likely than not to be enacted, the final vote may not happen until January 2018.
Secondly, for taxpayers who plan to itemize deductions in 2017 but might not itemize in future years, there are at least two tax-saving strategies available these last few weeks of 2017:
- Pay State and Local Taxes in 2017 (Not 2018)
Unless a taxpayer is subject to the alternative minimum tax (“AMT”), they will save federal income tax by paying state and local taxes in 2017 rather than 2018. They might also consider paying property taxes in December 2017 rather than 2018. If a taxpayer believes they will owe state income tax when filing their 2018 return, they might consider paying that amount with an estimate in December 2017. This is likely better than writing a check in 2018 that will no longer be deductible on the federal income tax return.
- Accelerate Charitable Gifts into 2017, and Consider a Donor Advised Fund
If a taxpayer will itemize their deductions in 2017 but will not in 2018, they should consider accelerating charitable gifts into the year 2017. One way to get an income tax deduction in the year 2017 for gifts that a charity will not receive until 2018 or later years is to contribute to a “donor advised fund” in the year 2017. A taxpayer could establish the fund with a charity that administers such funds, and then recommend grants from the fund to charities in the future years.
The best asset to donate to a charity is property which, if sold, would produce a long-term capital gain. Doing so allows a taxpayer to claim a charitable tax deduction for the full value of the property (which is not available for short-term capital gain property) and eliminates tax on the growth of the investment.
Charitable Gifts From an IRA
The House and Senate tax bills make no change to the popular law that permits individuals over age 70 ½ to make tax-free charitable gifts from their IRAs. For those that continue to itemize deductions, this will be very attractive in 2018 and later years, but the donor must be over the age of 70 ½ to enjoy this provision.
Taxpayers should follow the progression of this tax legislation closely. If enacted, an estimated 30 million taxpayers who will no longer itemize deductions in future years might consider these year-end strategies to maximize their 2017 tax savings. Please contact your Varnum estate planning attorney with any questions.