In the final hours of 2017, President Trump signed into law the most sweeping tax legislation in recent memory, the Tax Cuts and Jobs Act (TCJA). This legislation affects most areas of Federal income taxation in the United States for both individuals and businesses. A few of the major changes include drastically lower corporate tax rates, revised personal income tax brackets, new deductions, and the elimination of some of the more familiar deductions.
One of the most significant changes to personal income taxation are the changes to the Schedule A, and the drastically increased standard deductions. A few of the changes to Schedule A are as follows:
- State and local tax deductions limited to $10,000. This includes property tax and income tax paid to state and local jurisdictions.
- Elimination of the 2% miscellaneous itemized deductions. These include tax prep fees, investment fees, employee business expenses, and legal fees for the preservation of wealth amongst others.
In addition to the changes in what can be an itemized deduction, the standard deductions saw the following changes:
- Single standard deduction went from $6,350 in 2017 to $12,000 in 2018
- Head of household standard deduction went from $9,350 in 2017 to $18,000 in 2018
- Married filing joint standard deduction went from $12,700 in 2017 to $24,000 in 2018
Given these changes, it is obvious that many taxpayers that once qualified to itemize their deductions may now benefit from using the higher standard deduction amounts. This poses a problem to those who fall into this category, but still wish to donate to charitable organizations. Fortunately, there are few planning techniques that may still allow taxpayers to benefit from making charitable contributions. These strategies include charitable IRA distributions, donations to a taxpayer advised fund, and strategizing the timing of your deductions.
- Charitable IRA Distributions – While there are specific rules that apply to qualify for a charitable IRA distribution, the benefit that a taxpayer receives from this strategy is better than any other discussed here. With a charitable IRA distribution, the taxpayer will notify the IRA trustee to make a direct contribution to a specified charity. The benefit here is that the donation amount will be completely excluded from income! It won’t even show up as a taxable amount on your tax return. This effectively gives the taxpayer a deduction for the donation, as well as allows them to take the new higher standard deductions amounts. This technique is especially beneficial for taxpayers that are required to take minimum distributions from their IRA’s. As stated earlier however, there are certain rules that apply to qualifying charitable IRA distributions, so be careful or you may end up with a big and unexpected tax bill!
- Donor Advised Fund – Donations to a donor advised fund gives a taxpayer the ability to donate to the fund and receive an immediate tax deduction. The taxpayer could then direct the fund to make periodic smaller donations to designated charities over time, even crossing from year to year. This technique may be beneficial to taxpayers who have the means to make a large donation in the current year to exceed the standard deduction amount but would like their designated charities to receive the funds over a period of time rather than all at once.
- Strategizing the Timing of Donations – Rather than making donations in two consecutive years, make all your donations in one year. Then take the standard deduction the following year, and so on. This technique is good for taxpayers that would still like to donate to charitable organizations, but who may not be able to donate enough in any given year to make itemizing their deductions a benefit over the standard deduction. This would allow a taxpayer the benefit of itemizing their deductions every other year and taking the standard deduction in the off years.
These planning techniques may not apply to everyone, and some taxpayers may not qualify to itemize their deductions. For these reasons thorough research and planning is essential to maximize your tax dollars, and ensure that you are not making any mistakes. Our Tax Experts at Precision Tax Relief have extensive tax and tax planning experience, and would be thrilled at the opportunity to earn your business.