Consider Accelerating Charitable Donations
With the initial release of the Tax Cuts and Jobs Act (H.R.1) by the House Ways and Means Committee last week, we got our first real glimpse of what the tax code could look like under the Trump administration. While revisions are likely to be made before a new tax code is finalized, waiting until the changes are approved (if they are approved) in late December could mean missing some significant tax planning opportunities.
Even though nothing is final yet, the general advice for middle-class taxpayers is to find ways to push taxable income from 2017 into 2018 (hoping that tax brackets will be more friendly), and accelerating itemized deductions from 2018 back into 2017 (when you get the most benefit from them). For most taxpayers, this is sound advice even if the tax code isn’t revised for 2018. However, if the current proposal to raise the standard deduction and eliminate several itemized deductions becomes law for 2018, then finding ways to shift itemized deductions from 2018 into 2017 could result in significant tax savings over the two-year period.
Here is a simplified example:
Assuming that my wife and I expect to have $15,000 of itemized deductions at the end of 2017 without doing any additional tax planning, we will be claiming the itemized amount on our tax return since this amount is higher than the standard deduction for 2017 ($12,700). Under the proposed tax code for 2018, if our itemized deductions next year will be $15,000 again, we would not claim the itemized amount in 2018 since the standard deduction for a married couple would go up to $24,400. Under this scenario, our deduction total over the two years would be $39,400 ($15,000 + $24,400). However, if $5,000 of our itemized deductions in 2018 would have been related to a charitable donation, and we choose to make that donation in December 2017 instead of waiting until 2018, we would effectively increase our 2017 itemized deduction by $5,000 without any reduction to our 2018 standard deduction. Now, instead of $39,400 of deductions for the two years, we will receive $44,400 ($20,000 + $24,400) of deductions over those years. If we are in the 25% tax bracket for 2017, this equates to $1,250 of true tax savings just by making the donation earlier than planned ($5,000 x 25%).
When it comes to making tax deductible donations, cash isn’t the only option – if you’ve been planning to clean out the garage and donating unused items to a local charity, this can be done prior to year-end too. Appreciated stocks and mutual funds held in taxable investment accounts are also an ideal source for contributions prior to year-end because you will get a charitable deduction for the full market value of the donation without having to pay tax on any of the built-in capital gains.
In summary, if you currently itemize your deductions each year, but might not be able to next year if the proposed tax rule changes take effect, then consider accelerating some of your 2018 deductions into 2017 in order to maximize the total deduction received over the two-year period.
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