11 Dec 2017 Proposed Tax Changes Need Your Attention NOW
by Christopher R. Hoyt, Professor of Law
Univ. of Missouri (Kansas City) School of Law
2017 – THE LAST YEAR THAT I’LL GET TAX SAVINGS FROM MY CHARITABLE GIFTS
For many of us, the year 2017 will be the last year that we will get income tax savings from our charitable gifts. It will be for me, assuming that the proposed tax changes are enacted into law.
There are some tax-saving steps that you and I can take in the year 2017 before the changes take effect in 2018. They are described below.
WHY WON’T I BE ABLE TO GET TAX SAVINGS FROM MY CHARITABLE GIFTS IN THE FUTURE?
By way of background, many of us itemize our income tax deductions because our state & local income and property taxes exceed the thresholds for the standard deduction. In 2017, the thresholds are $12,700 for a married couple filing a joint return, $6,350 for an unmarried individual, and $9,350 for head of household. Thus, every charitable gift that we made in past years produced income tax savings.
If the proposed law is enacted, things will change dramatically in the year 2018. Both the House and the Senate tax bills propose eliminating virtually every itemized deduction, except for (1) home mortgage interest, (2) charitable gifts and (3) up to $10,000 of property tax (oversimplified). Of greatest significance, people will no longer be able to deduct their state & local income taxes.
And both the House and the Senate tax bills propose raising the standard deduction to $24,000 for married couples, $12,000 for unmarried individuals, and $18,000 for head of household. The outcome for people who don’t pay mortgage interest or property tax is that in future years they won’t get any tax savings from the first $24,000/$12,000 that they donate to charities each year. And there will be no tax savings from charitable gifts if they donate less. They will instead take the $24,000/$12,000 standard deduction.
On a personal note, that is my situation. I’ll take the $24,000 standard deduction. So my charitable gifts will not produce any income tax savings in future years.
YEAR-END TAX STRATEGIES FOR 2017
First, this law has not yet been enacted and there is uncertainty over whether Congress will indeed make these tax changes. I think it is more likely than not. We won’t know for certain until the final vote, which might not happen until January 2018. That makes tax planning fairly challenging for these last few weeks of the year 2017.
Second, if you will itemize your deductions in 2017, and you might not itemize in future years, there are at least two tax-saving strategies available these last few weeks of 2017:
PAY YOUR STATE & LOCAL TAXES IN 2017, NOT 2018
Unless you are subject to the alternative minimum tax (“AMT” – you probably already know whether or not you are subject to the AMT), you will save federal income tax by paying your state & local taxes in 2017 rather than 2018. Pay your property tax in December 2017 rather than 2018. If you think that you will owe state income tax when you file your return in 2018, pay that amount with an estimate in December 2017. That is better than writing a check in 2018 that won’t be deductible on your federal income tax return.
If, however, you are subject to the AMT, paying more state & local tax will not likely reduce the AMT.
CHARITABLE GIFTS – ACCELERATE GIFTS INTO 2017 – DONOR ADVISED FUND?
If you will itemize your deductions in 2017 but will not itemize in 2018, accelerate your charitable gifts into the year 2017. If you made a multi-year pledge, pay the amounts scheduled for future years in the year 2017. See whether your favorite charity will give you credit in the year 2018 for a larger amount that you pre-pay in 2017 (e.g., “sponsor” or “patron” status in 2018, or whatever giving level you strive for with that charity).
* DONOR ADVISED FUND FOR CHARITABLE GIFTS
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. Establish the fund with a charity that administers such funds, and then recommend grants from the fund to charities in the future years. Some organizations will open funds for as little as $5,000, and permit grants as small as $50.
* THE BEST ASSETS TO DONATE TO A DONOR ADVISED FUND: APPRECIATED STOCK, MUTUAL FUNDS, AND ETFs
The best asset to donate to a charity is property which, if sold, would produce a long-term capital gain. Long-term usually means you’ve owned the capital asset for more than a year. There are two advantages: First, you can claim a charitable tax deduction for the full value of the property. Second, you will never pay tax on the growth of your investment.
* DON’T EXCEED THE ANNUAL CHARITABLE DEDUCTION LIMITATION
If you are trying to save taxes, don’t donate more to a charities than you can deduct in the year 2017. The annual deduction limitation for charitable gifts of appreciated stock is 30% of adjusted gross income (“AGI”). For gifts of cash, the limit is 50% of AGI. For example, suppose someone donates $70,000 to public charities in a year when that person’s AGI is $100,000. The maximum deduction if the $70,000 consists of appreciated stock will be $30,000 (30% times AGI), leaving $40,000 to be carried forward for five years. If the $70,000 was cash, then $50,000 (50% times AGI) could be deducted that year and there is a $20,000 carry forward.
WHAT ABOUT MAKING CHARITABLE GIFTS FROM MY 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. This will be very attractive in the year 2018 and in later years. But the donor has to be over the age of 70 ½, which in my case won’t happen until 30 years in the future. Believe me.
BUT WAIT! THE LAW HASN’T BEEN ENACTED YET !
Keep an eye on this tax legislation. If it is enacted, and if you are one of the estimated 30 million taxpayers who will no longer itemize your deductions in future years, you might consider these year-end strategies to get tax savings from paying your state & local taxes and from making your charitable gifts.”
Christopher R. Hoyt
Professor of Law
Univ. of Missouri (Kansas City) School of Law
500 E. 52nd Street
Kansas City, MO 64110-2499
Voice: (816) 235-2395
DISCLAIMER: The opinions expressed in this message are those of the author and do not necessarily reflect the views of the University of Missouri. The statements apply to a general discussion of legal issues and do not constitute legal advice or a legal opinion. No attorney-client relationship is created by this message. Seek independent counsel to act upon any ideas presented in this message.
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