Jim and Deb’s December Tip: 2017 Year-End Tax Planning
By Jim Friedman and Deb Steinbuch
Year-end is often the best time to consider financial and tax planning strategies. As we write this, Congress is close to passing significant changes to the tax laws that could, if enacted, affect financial strategies and tactics. This makes it more important than ever to meet with your advisors to review your investment portfolio and consider tax, financial, and charitable giving strategies before December 31. Things may become clearer as year-end approaches—but be prepared to be flexible and prepared to act in a short timeframe. There is good news: you can take steps before December 31 that can lower your 2017 tax liability.
Income Taxes: If comprehensive tax reform (or even a slimmed down “tax cut package”) is enacted, marginal tax rates (the rate you pay on “the next dollar” of income) and the effective tax rate (your average rate on all items of income and deductions) is likely to change. Current thinking is that the top tax rate of 39.6 percent will continue to apply for those with incomes in excess of $1 million. The mix of changes to specific tax deductions and credits by any tax reform plan will also have a dramatic impact on your overall tax situation.
Tried and true year-end tax strategies you should consider generally take two approaches: try to defer items of income to next year and try to accelerate deductions to this year.
- The larger your income, the more desirable it will be to defer receipt of a bonus payment to 2018, postpone the sale of appreciated assets, and delay the receipt of self-employment income. Deferral postpones the obligation to pay taxes: you get to keep the tax dollars for another year. In addition, the current House and Senate versions of tax reform will reduce marginal tax rates for many taxpayers beginning in 2018. Deferral will therefore reduce the tax bill.
- Accelerating deductions to this year also may make sense: lock in the deduction and claim the tax benefit now, and avoid the risk that Congress chooses to effectively eliminate your ability to claim the deduction. This is particularly true for charitable deductions. The current proposals don’t eliminate the charitable contribution deduction; however, the proposals increase the standard deduction and eliminate other popular itemized deductions. Result: if you itemize, 2017 could be the last year you will be able to convert every charitable contribution into a tax savings.
Are you subject to the alternative minimum tax (the “AMT”)? The AMT is a tax on otherwise tax-favored items of income and itemizable deductions. It affects higher-income taxpayers with tax-exempt bond income and significant deductions for property and state and local income taxes. The tax changes the House and Senate are considering include a repeal of the AMT, probably for 2018. The good news: charitable contributions are deductible for both regular income tax and for AMT purposes. Even if the AMT is repealed, accelerating charitable contributions may make good tax sense.
If you itemize your deductions, gifts of cash to public charities such as the Jewish Federation are fully deductible, up to 50 percent of adjusted gross income. Any excess can be carried forward and could be deductible for up to five years. Tax reform could increase this AGI limitation for cash gifts to 60 percent starting in 2018. Are your charitable contributions sufficiently large so that this possible change looks intriguing? The Federation’s professional staff will work with you to determine the best strategies in your situation.
Investment Assets: The stock markets are at all-time highs; your investments may have appreciated dramatically. The House and Senate proposals preserve lower rates on most capital gains sales, with a top rate that is not dramatically changed from current rates for most taxpayers. Therefore, part of your capital asset review could include a gift of appreciated securities to charities before the end of the year. For example, you can avoid paying any capital gains tax on the value of securities transferred to the Federation and may be able to receive a charitable contribution deduction for the full fair market value of the securities at the time of the gift.
- Gifts of appreciated assets are fully deductible up to 30 percent of adjusted gross income. Any excess can generally be carried forward and be deductible for up to five years.
- Donating appreciated stock, either to create a donor-advised fund (“DAF”) at the Federation or adding such securities to an existing DAF, is an excellent way to maximize tax saving from such gifts as well as provide you with a vehicle from which you can make recommendations for future charitable grants.
IRA Charitable Distributions: Many individuals over age 70 ½ find it advantageous to transfer funds directly from their IRAs to charities. The Internal Revenue Code permits these tax-free transfers up to $100,000 each year. They are excluded from income, can be used regardless of whether or not you itemize, and satisfy the IRA required distribution rules.
- Since the current House and Senate proposals will eliminate the value of itemizing deductions for many taxpayers, using IRA charitable distributions will become the tax-preferred charitable giving opportunity. It produces the same federal income tax result—and in many states also saves state income taxes.
- Result: before this year ends, review your IRAs. You can use this tool to make contributions to the Federation for the annual campaign, a Lion of Judah Endowment or some other special endowment fund.
Estate Taxes and Lifetime Giving: Both the House and Senate proposals make significant changes to the federal estate and generation-skipping transfer tax and may change the federal gift tax.
- Taxpayers with very large estates should consider making annual exclusion gifts (up to $14,000 per individual recipient) sooner rather than later.
Federation’s professional advisors will work with you and your other advisors to maximize the benefits of these and other tax planning strategies for you and the Jewish community.
This post is for informational purposes only and should not be construed as legal, tax or financial advice. When considering gift planning strategies, you should always consult with your own legal and tax advisors.
For more information, you can reach Jim Friedman, Director, Planned Giving and Endowments, at 513-985-1524 or firstname.lastname@example.org; or Deb Steinbuch, Planned Giving and Endowment Manager at the Jewish Federation, at 513-985-1593 or email@example.com. You can reach the Jewish Federation’s Create Your Jewish Legacy team here and the community-wide Create Your Jewish Legacy initiative here.
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