Continuing our review of the 2018 tax law changes, we’ll take a closer look at the nearly-doubled standard deduction, how it eliminates the opportunity to deduct charitable contributions for many taxpayers, and two gifting strategies to consider if you’re among those impacted.
The basics:
- The Standard Deduction will be $12,000 for individuals and $24,000 for married couples, as compared to just $6,350 for individuals and $12,700 for married couples under prior law.
- State and Local taxes (SALT) are now capped at $10,000. This includes both the state income and property taxes that you pay. The same $10K cap applies whether you’re married or single
- Previously deductible expenses like moving, tax preparation expenses, various unreimbursed employee business expenses (including the home office deduction) were all eliminated.
The Challenge:
In order to continue itemizing (especially for married couples) mortgage interest, medical/dental expenses, charitable contributions and/or losses that qualify for federal disaster relief, must be substantial. Since most families – even those with high state taxes and mortgage interest – will no longer itemize, their charitable contributions will no longer directly benefit their taxes. While we can hope that won’t disincentivize charitable giving, there are strategies to could help you retain the tax benefits of those gifts.
Planning Strategies:
- Qualified Charitable Distribution (QCD): This is an easy answer, if you’re more than 70.5 years old. Existing tax law allows you to give up to $100,000 to charity directly from your pre-tax IRA without counting the distribution as taxable income. This, in effect, affords you the same deduction for your contribution that you enjoyed when you itemized your return.
- Lumping: Building on the example above, let’s say your regular annual charitable contributions add up to $2,500 per year and the rest of your itemize-able deductions add up to $21,000. By simply making your charitable contributions every-other year or every third year, you’re able to itemize and regain the tax benefit on more of your contributions.
Drop us a line with questions or for additional information.
