Approximately two-thirds of Americans’ charitable giving occurs during the holidays. This is only natural since December 31 is a hard deadline for making contributions which may qualify for an itemized charitable deduction on your tax return. Choosing which organizations are most worthy and the amounts to be given can be time consuming, and there are many ways to structure contributions, such as making a qualified distribution from your IRA, contributing to a Donor Advised Fund, donating appreciated stock, or simply writing a check.
If that weren’t enough to add to your holiday stress, Congress and the Trump administration are proposing changes to the tax code that may add substantial challenges to your philanthropy; some of which may become evident before the end of this year.
Trio of Changes
If it comes to fruition, the proposed tax reform contemplates three significant changes: Reducing the use of personal exemptions, eliminating or limiting most itemized deductions and raising the standard deduction – for taxpayers who don’t itemize – from $12,700 to $24,000 (for married taxpayers filing jointly.)
Currently, all taxpayers are entitled to a personal exemption of $4,050 for themselves, their spouse and each dependent. Potential itemized deductions (e.g., state and local taxes, mortgage interest, medical expenses in excess of 10% of Adjusted Gross Income (AGI), and charitable contributions) are then added, and if they exceed the standard deduction, you can itemize and lower your tax bill.
Under the proposal, personal exemptions would be eliminated and rolled into an increased standard deduction. A couple who seeks to itemize will lose their $8,100 in exemptions and then have a hurdle of $24,000 to reach before it makes sense to itemize. For example, in 2017, the average American couple with AGI between $100,000 and $200,000 recognizes $10,000 in mortgage interest, $10,000 in state income and property taxes and $4,000 in charitable contributions, bringing their total deductions to $32,100. In 2018, if the current proposal becomes law, the same couple would have no incentive to itemize and will lose any tax benefit from the $4,000 in charitable contributions.
Congress is working on an extremely tight schedule to get a bill passed before December 31. If the process spills over into next year, practically, there will be nothing to do before year-end. But if President Trump signs into law a tax bill including the above scenario, it may pay to advance the charitable contributions you were considering making next year into 2017 – in order to obtain the current tax deduction. And the longer term strategy might be to bunch your charitable contributions into alternating years in which you itemize and take the standard deduction in between.
As usual, please consider this general information and consult your tax advisor regarding your individual circumstances.