The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides various relief provisions for individuals, including provisions that benefit individuals in relation to their retirement plans and that provide an increase in allowable charitable deductions. Continue reading
One of the more visible changes from the Tax Act will be the increase in the standard deduction. When completing an annual tax return, a taxpayer has the choice to either take a standard deduction or to itemize deductions. The standard deduction is a flat dollar amount which reduces your taxable income for the year, with the same standard deduction amount applying to every taxpayer who takes the standard deduction. The itemized deduction instead allows a taxpayer to deduct a number of different expenses from throughout the year, including certain medical expenses, mortgage interest, casualty and theft losses, state and local taxes paid, and charitable contributions. Whether a taxpayer uses the standard deduction or itemizes his or her deductions will depend on whether that taxpayer’s itemized deductions exceed the standard deduction amount.
In 2017, the standard deduction amount was $6,350 for single taxpayers and $12,700 for married taxpayers filing jointly. The Tax Act has nearly doubled these amounts for 2018, with the standard deduction increased to $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly. Limitations have also been placed on deducting state and local taxes (capped at $10,000) and on mortgage interest (limited to new loans, capped at $750,000).
Taxpayers now have a higher standard deduction amount they need to pass before itemizing their deductions and they have more limited expenses available in order to get over that bar. Fewer people will be generating the expenses needed to make itemizing deductions worthwhile. The Tax Policy Center estimates that the percentage of taxpayers itemizing deductions will drop from 30% to only 6%.
If fewer taxpayers are itemizing their deductions, the tax benefits of charitable giving will be available to fewer taxpayers. The Tax Policy Center estimates charitable giving to drop anywhere from $12 billion to $20 billion in the next year. Taxpayers may instead bunch their charitable gifts into a single year, itemizing their deductions in such a year while using the standard deduction in subsequent years rather than spreading out these gifts over a stretch of years.
People charitably give to their favorite organizations out of a humanitarian desire to help less fortunate people and to benefit the wider community; a smaller tax incentive will not change this. But the smaller tax incentive is expected to have a negative impact both for a taxpayer’s ability to deduct charitable gifts and for the amount of gifts charitable organizations expect to receive.
On December 22, 2017, President Trump signed into law the most important rewrite of the US tax code in decades. The federal law, which is entitled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution of the budget for the fiscal year 2018” (the Act), has no other name, as its short title, the Tax Cuts and Jobs Act, was stricken from the bill shortly before being signed.
We have prepared a summary of the Act as a non-exhaustive discussion of key changes to the tax code. We will continue to analyze the Act and will post updates and recommend planning strategies on this blog.
For more information regarding the Act, please see our previous related blog posts linked below:
- Planning to Live Beyond 2025? How You Can Still Enjoy Estate Tax Reform’s Sunset Special
- Rethinking Large 2017 Year-End Charitable Gifts
- 2017 Year-End Planning for Art, Equipment, and Other Non-Real Estate 1031 Exchanges
- Should You Reform Your Business for Tax Reform?
- What’s in the Tax Reform Bill?
On behalf of everyone at Williams Parker, we hope you and your family have a healthy and happy 2018.
Please note this post was co-authored by Elizabeth Diaz, Colton Castro, and Nicholas Gard.
Nicholas A. Gard
With the standard exemption increasing and federal income tax rates generally falling in 2018, accelerating charitable gifts into 2017 may seem like a no-brainer. You might want to think twice if you plan a large charitable gift.
Under current law, the income tax charitable deduction and many other itemized deductions gradually phase out as income increases above $313,800 for married jointly filing taxpayers. The phase out continues until the deductions are reduced by 80%.
The just-enacted Tax Cuts and Jobs Act suspends this limitation, allowing charitable and other itemized deductions without the income-based phase out. This could cause a 2018 charitable gift to produce a more valuable tax benefit than a 2017 gift, particularly for large gifts.
If you are unsure how to proceed, ask your CPA to run the numbers in both scenarios. Better to wait a year for the deduction, than to receive a much smaller benefit than you expected.
For more information regarding the Tax Cuts and Jobs Act, follow these LINKS: