The Tax Cuts and Jobs Act (the “Act”) is headed to the President’s desk for signing into law. Many taxpayers are wondering what can be done (or avoided) before the end of 2017 to maximize their tax efficiency this year and next. Here are a few strategies or issues to consider.
Individual taxpayers who will itemize their deductions for 2017 should consider making larger charitable contributions on or before December 31, 2017. There are two key reasons in support of larger current contributions. First, many taxpayers who currently itemize their deductions will start using the increased standard deduction in 2018 (standard deduction amounts in 2018 will be: $12,000 for individuals, $18,000 for heads of household, and $24,000 for joint filers). If a taxpayer’s combined itemized deductions do not exceed the new 2018 standard deduction amounts, any charitable contribution in 2018 will not generate a tax benefit. Therefore, accelerating a planned 2018 contribution to 2017 can provide a larger tax benefit.
Second, because many individual taxpayers are receiving a tax cut by virtue of the Act’s adjustments to tax rates and bracket structures, a current deduction may be more valuable, all else being equal.
However, taxpayers who make large charitable contributions relative to their income should consider waiting to make contributions until next year if the contributions will be made in cash (as opposed to appreciated stock or other property) because the Act increases the AGI limitation from 50% to 60% for cash contributions made after January 1, 2018.
Finally, if a taxpayer is interested in making a large charitable contribution in 2017 but does not have a donee in mind, the taxpayer could consider establishing or adding to an existing donor advised fund to hold the contribution. Contributions to donor advised funds provide the same deductions as contributions to public charities, and the taxpayer can retain the ability to select the intended charitable beneficiaries over a long period of time. If you do not already have a donor advised fund and wish to establish one in 2017, contact your financial institution as soon as possible, as most institutions have deadlines for account opening and funding which are earlier than December 31st.
State and Local Taxes – Property Taxes
For taxable years starting after December 31, 2017, the Act limits the ability of a taxpayer to deduct state and local taxes (for example, state and local income taxes and local property taxes) to $5,000 for an individual taxpayer and $10,000 for joint filers. The Act provides a “savings clause” so that state and local income taxes paid in 2017 for 2018 will be treated as paid in 2018. Therefore, taxpayers cannot receive a benefit by paying 2018 state and local income taxes early.
However, the “savings clause” described above does not limit the ability of taxpayers to pay 2017 state and local income taxes and 2017 property taxes ahead of schedule. Therefore, taxpayers who itemize should consider paying such state and local taxes for 2017 on or before December 31, 2017. Taxpayers should check with the county to ensure that they will accept payment in 2017 for 2017 real property taxes which are not due until 2018.
Suspension of Miscellaneous Itemized Deductions and Overall Limitation of Itemized Deductions
For taxable years starting after December 31, 2017, the Act suspends the ability of taxpayers to take miscellaneous itemized deductions including (for example) investment fees and expenses, legal fees and tax preparation fees, alimony, and moving expenses. Taxpayers may wish to pay these types of miscellaneous expenses for 2017 on or before December 31, 2017.
However, for the same period the Act eliminates the phase-out (cap) on most itemized deductions that remain (i.e., itemized deductions other than miscellaneous itemized deductions). If a taxpayer anticipates large itemized deductions that are typically phased out due to his or her income, that taxpayer may wish to push those deductions into 2018.