Charitable Giving becomes the beneficial variable you can control.
It’s here. And, it will likely impact all of us. But for those who like to give, The Tax Cuts and Jobs Act of 2017 can bring many new opportunities to give more and give more wisely. As the 2018 year gets underway, now is the time to consider how to optimize the new tax provisions to help more families thrive.
Consider the following new regulations and offsetting ideas for optimizing the benefits of the new tax act:
1) The Charitable Deduction was preserved…AND increased!
If you itemize, now you can give more and receive a tax deduction for your giving. The limit for giving has been increased from 50% to 60%, meaning that you can give up to 60% of your adjusted gross income to public charities and receive a tax break for doing so.
Example: Tom and Mary earn $100,000 in adjusted gross income. In 2017, they would have been able to give as much as $50,000 and take this as a deduction, thus reporting only $50,000 of income. In 2018, they can now give $60,000 and thus report only $40,000 of taxable income.
2) The Standard Deduction was increased…AND almost doubled!
Non-itemizers will benefit by applying the new standard deduction which reduces their taxable income ($12,000 for a single person and $24,000 for a married couple filing jointly). So, for those with smaller deductible expenses, (property/state/local income taxes or no debt on their home), this is a welcome tax break, meaning that more money will be available for discretionary spending, saving or giving.
For non-itemizers who are looking for a larger deduction than the new standard deduction amount, a smart strategy will be to double or triple your giving in one year. This will allow you to itemize in that one year.
Example: Mark is single and makes $100,000 in income annually. He is accustomed to giving 10% of his income each year ($10,000). With no mortgage and few other deductions, his total deductions do not exceed the new standard deduction of $12,000. Therefore, under the new tax act, Mark wouldn’t take a tax deduction for his giving. However, Mark can consider a strategy of combining two years of giving into one year so as to exceed the standard deduction. As a result, in year one, Mark can take a deduction of $20,000 (two years of giving) and in year two, take the standard deduction of $12,000. He may have so enjoyed the thrill of giving 20% in year one that he starts a new habit of giving each year!
3) For Itemizers there are new deduction adjustments…And a surtax has been removed!
Property, state, and local taxes may still be deducted up to $10,000 in aggregate annually. However, mortgage interest deductions are limited to interest on up to $750,000 of debt for new mortgages and home equity loan interest is no longer deductible. As a result of these changes, families will likely revisit how they use debt.
But there is some good news! The deduction limit (the Pease Limitation) was removed which previously had phased out itemized deductions for high-income taxpayers (earning over $305,050 married). This creates greater liberty for individuals and families to give increasingly more and still receive the tax benefits when making major gifts.
4) Estate Tax Exemption has almost doubled!
The new estate tax exemption has increased to $11.2 million per individual and $22.4 million for married couples. Families will want to revisit their plans for wealth transfer to adjust for these higher limits available from 2018 through 2025. Giving assets to future generations and enabling them to establish their charitable giving habits earlier in life, could be a smart way to teach values with the transfer of valuables.
5) Cap Gains Tax Rates stay intact…BUT a new deduction limit effectively raises federal taxes
In prior years, there has been a federal tax deduction for paying state taxes. Under the new tax act, there is only a federal deduction for the first $10,000 you pay in state, local and property tax. With this new limit, you may not receive a federal deduction on any state taxes paid over $10,000. So now, giving an appreciated asset is more attractive because you get the full deduction up to (30% of adjusted gross income) at the fair market value without limitation and the best capital gain treatment. When the charity sells the asset, no capital gains tax is paid (in most cases).