The Tax Cuts and Jobs Act of 2017 brought with it many changes, including several to itemized deductions, such as a limitation on the total deduction for state and local taxes, changes to the mortgage interest deduction, an increase in the AGI limitation on cash contributions and the elimination of the deduction for 2% miscellaneous itemized deductions.
These changes will certainly impact many taxpayers and new planning ideas are a necessity. Many taxpayers’ largest itemized deduction was the state and local tax deduction. With the new law allowing only $10,000, we may see many taxpayers claiming the standard deduction. For a couple filing married filing joint, the standard deduction is now $24,000.
These changes will put taxpayers at risk of losing the benefits of most of their charitable contributions. One strategy to mitigate the potential loss is the use of a Donor Advised Fund (DAF). A DAF gives the owner the flexibility to keep their annual charitable giving the same, while maintaining most of the tax benefits for charitable contributions. A taxpayer can open a DAF, which is relatively economical to establish and maintain, and make a large contribution to it one year to ensure the benefit of itemizing their deductions. In subsequent years, where there may not be a large addition to the fund, they will likely claim the standard deduction, but still be able to support their favorite charity by making donations from the fund. This way, they can benefit from the tax deduction in one year as well as continue to support the charity each year. On the flip side, by making a small direct donation to the charity annually, the taxpayer may not be able to itemize their deductions and as such claim the standard deduction, resulting in zero tax benefit for these small annual contributions.
Another option is to bundle your charitable donations into one year, to cover multiple years of support. This way, you would notify the charity that the larger gift covers a multiple-year period and likely increase the opportunity for you to itemize deductions in the year you make the donation while still giving the same level of support to the charity.
These planning opportunities should be considered as part of your entire tax plan for any given year. If there is a year where you know income will be significantly higher due to a specific tax event, you may want to plan to increase your charitable deductions so that you are able to itemize and maximize your deduction amount to minimize tax.
The TCJA will impact many planning practices and open the door to many new planning ideas. Be sure to consult your tax-advisor.
Lauren Reo is a Senior Tax Manager at the New Jersey office of Mazars USA LLP. Lauren has over 20 years of experience in public accounting. Her focus is on serving as a trusted advisor to successful individuals, entrepreneurs and family groups.