As you may be aware, significant changes to the federal income tax laws may be coming for 2018. Both the House of Representatives and the Senate have now passed tax bills that, if enacted into law, will make sweeping changes to many provisions of the tax code. The bills will need to be reconciled and passed by both chambers of Congress before being sent to the President for signature in order to become law. While it is possible that Congress may be unable to enact some version of one of these two bills, we believe it is more likely than not that one of these bills (most likely the Senate version) will become law with some amendments to be made in the next few weeks.
Because the end of the year is quickly approaching, any tax planning to take advantage of some of the expiring tax provisions will need to be completed prior to December 31, 2017.
One of the most significant proposed changes will be the large increase to the standard deduction and elimination of the deduction for state income tax paid. The standard deduction will likely double for a single taxpayer from $6,350 (for 2017) to $12,000 (for 2018) and, for married joint filers, from $12,700 (for 2017) to $24,000 (for 2018). One of the largest itemized deductions for many taxpayers is the state income tax paid. As such, the vast majority of taxpayers will likely no longer itemize their deductions in 2018 and beyond. For millions of taxpayers, 2017 will be the last year to receive any tax benefit for certain itemized deductions.
So what should you be doing? Here are a few recommendations:
I. Charitable Giving
Accelerate Charitable Gifts into 2017: If you expect to itemize your deductions in 2017, but, like most taxpayers, will likely not itemize in 2018, accelerate your charitable gifts into this the year, 2017. If you made a multi-year pledge to a charitable organization, pay the amounts scheduled for future years before December 31, 2017. If you are able, make any gifts that you expect to make in future years before the end of this year. For many people, 2017 will likely be the last year to get any tax benefit from making gifts to charity or church.
Consider a Donor Advised Fund: If you prefer not to give funds all at once, or if you want to have the ability to change the charitable recipient in the future, you could consider making a gift to a donor advised fund with a charity, community foundation or other financial institution that administers these funds. This will allow you to take the charitable deduction in 2017 and then make recommendations for distributions to charity from the fund in future years.
Donate Appreciated Property: I also recommend that you donate property to charity which, if sold, would produce a long-term capital gain. Generally, capital assets and property are subject to long-term capital gains upon sale if you have held the property for over a year. By donating appreciated stock or property you will be able to claim a charitable tax deduction for the full current fair market value of the property and you will avoid paying tax on the capital gain.
Beware of Annual Charitable Deduction Limitation: When making your charitable gifts before the end of 2017, please note that for gifts of cash, the total maximum amount that you can deduct is 50% of your adjusted gross income (“AGI”). For appreciated stock or property, the charitable deduction is limited to 30% of your AGI. To the extent that your charitable giving exceeds these thresholds, you are allowed to carryover the unused deduction to future years. However, as noted above, the carryover may be of little value in future years for taxpayers who will likely be taking the higher standard deduction.
Consider Gifts from your IRA: You may be aware that taxpayers over the age of 70 ½ are permitted to make tax-free charitable gifts to charity directly from their IRAs. This strategy is even better than making a deductible cash gift, because the income is not added to your AGI. The House and Senate tax bills make no change to this popular provision so, while this is still a great way to give to charity in 2017, this does NOT need to be done before the end of this year. This will likely be a very attractive giving strategy in 2018 and future years for those of you over the age of 70 ½.
II. Prepay State and Local Taxes
Unless you are subject to the alternative minimum tax (“AMT”), it will likely be advantageous to pay as much of your 2018 property taxes before the end of the year as possible. If you are able, pay your March 2018 property tax bill before the end of 2017. If you think that you might be underpaid on your state income tax, then increase the amount of your last estimated payment and pay it before December 31, 2017. Paying the state income tax due this spring may not provide any tax benefit.
Again, if you happen to be subject to the AMT, prepaying your property and income tax will not help, because the AMT essentially limits your ability to deduct more of these expenses. You can look at Line 45 of Page 2 of your 2016 Form 1040 to determine if you paid AMT last year.
We will continue to monitor the bills in Congress as they move forward in Washington. Again, these proposals are not law yet, could be amended significantly and may not be passed into law at all. However, I think the strategies of prepaying your charitable contributions and state and local taxes so that they can be deducted on your 2017 return are prudent and would likely have little, to no, downside even in the event that the current tax bills do not become law.
Questions relating to this article can be directed to our estate planning practice attorneys.