How Will the New Tax Law Affect You?

by | Jan 15, 2018 | Taxes | 0 comments

Tax Cuts and Jobs Act

While most of the new tax law – the Tax Cuts and Jobs Act – has to do with reducing the corporate tax rate from 35 percent to 21 percent, some provisions relate to individual taxpayers. Before we get into the details, be aware that almost everything listed below sunsets after 2025, with the tax structure reverting to its current form in 2026 unless Congress acts between now and then. The corporate tax rate cut, however, does not sunset. Here are the highlights:

  • Estate Taxes. If you weren’t worried about federal estate taxes before, you really don’t need to worry now. With the federal exemption already scheduled to increase in 2018 to $5.6 million for individuals and $11.2 million for couples, the Republicans in Congress and President Trump have now nearly doubled this to $11.18 million (estimate) and $22.36 million (estimate), respectively, indexed for inflation. The tax rate for those few estates subject to taxation remains at 40 percent.
  • Tax Rates. These are slightly reduced and the brackets adjusted, with the top bracket dropping from 39.6 percent to 37 percent.
  • Standard Deduction and Personal Exemption. The standard deduction increases to $12,000 for individuals, $18,000 for heads of household and $24,000 for joint filers, all adjusted for inflation. Personal exemptions largely disappear.
  • State and Local Tax Deduction. Now referred to as “SALT,” this is now subject to a cap of $10,000,
  • Home Mortgage Interest Deduction. The limit on deducting interest on up to $1 million of mortgage interest stays in effect for existing mortgages. New mortgages taken on after December 15, 2017, are subject to a $750,000 limit. The deduction for interest on home equity loans disappears.
  • Medical Expense Deduction. After much outcry in response to the House version of the tax bill, which would have eliminated the medical expense deduction, it survived. And, in fact, it was enhanced by permitting medical expenses in excess of 7.5 percent of adjusted gross income to be deducted in 2017 and 2018, after which it reverts to the 10 percent under existing law.
  • 529 Plans. These accounts permitting tax-free accumulation of capital gains and dividends to pay college expenses can now be used for private school tuition of up to $10,000 a year.

Depending on your income and the amount of state and local taxes you have been paying, you may get a small tax cut. The bigger question is how the projected reduction in tax revenues of $1.5 trillion over the next 10 years will be paid for. This amount may simply be added to the deficit, or it may be used as a justification for “entitlement reform,” i.e., cutting Medicare, Medicaid or Social Security. It may also squeeze out other spending, such as investment in infrastructure.

Charitable Giving

The new tax law makes it harder to claim a tax deduction for charitable contributions. While charitable giving should not be only about getting a tax break, if you want to reap a tax benefit from your contributions, there are a couple of options.

Tax Cut and Jobs Act

The Tax Cut and Jobs Act, enacted in December 2017, nearly doubled the standard deduction to $12,000 for individuals and $24,000 for couples. This means that if your charitable contributions along with any other itemized deductions are less than $12,000 a year, the standard deduction will lower your tax bill more than itemizing your deductions. For most people, the standard deduction will be the better option.

If you still want to maximize the tax benefits of charitable giving and you have the financial means, one option is to double your charitable donations in one year and then skip the donation the following year. For example, instead of giving $10,000 a year to charity, you could give $20,000 every other year and itemize your deductions in that year.

Donor-Advised Fund

Donor-advised funds are a growing trend in giving that may get more popular due to the new tax law. These funds allow you to donate money, receive a charitable tax deduction, and continue to grow the money until you are ready to distribute it to a charity or charities of your choice.

A donor-advised fund is established through a charity or nonprofit. The way the fund works is that you donate assets (it can be cash, stocks, or real estate) to the fund. The gift is irrevocable – the nonprofit controls the assets and you cannot get the assets back. You may then take an immediate tax deduction for the gift to the fund. Once the fund is established, you can tell the fund where to donate the money, and when.

These funds are becoming more popular in part because the new tax law enacted in 2017 doubled the standard deduction to $12,000 for individuals and $24,000 for couples. This means that if your charitable contributions along with any other itemized deductions are less than $12,000 a year, the standard deduction will lower your tax bill more than itemizing your deductions. For most people, the standard deduction will be the better option and they will get no deduction for their charitable contributions.

A donor-advised fund allows you to contribute several years’ worth of charitable donations to the fund at once and receive the tax benefit immediately, making it more likely that itemizing would be more advantageous than taking the standard deduction.

There are different types of donor-advised funds. Some are spinoffs of large financial investment firms like Fidelity and Schwab. Others may be smaller community funds. Some universities and faith-based organizations also have funds. Each fund has its own rules on how the money is distributed. There may be limits on how much you can donate each year or a requirement that you donate a certain amount. Some funds are single-issue funds that may require that at least some of the donations go to a particular charity or cause. Each fund also has its own rules on whether the fund can be passed down to heirs.

Before deciding to give to a donor-advised fund, you should investigate the fund’s rules, fees, and how established the fund is. It is best to consult with your financial advisor before making any major donations.

For more information about donor-advised funds from the Chronicle of Philanthropy, click here.

Qualified Charitable Donation

If you are taking required minimum distributions from an IRA, another option is to donate those distributions directly to charity through a qualified charitable donation. The distributions won’t be included in your gross income, which means lower taxes overall. The donation must be made directly from the IRA to the charity and different IRAs have different rules about how to make the distributions.

The IRA Charitable Rollover

The IRA Charitable rollover allows owners of a Traditional IRA (or inherited Traditional IRA) who are age 70 ½ or older to make tax-free IRA contributions directly to qualified public charities.  Each age-eligible IRA owner can transfer up to $100,000 tax-free per tax year.  The IRA gift must be made on or before December 31 of the calendar year in which the taxpayer wishes to use the IRA Charitable Rollover gift vehicle for income tax purposes.  The check from the IRA must be made out to directly to a charity, not the IRA owner.

Advantages of IRA Charitable Rollover

Once a taxpayer turns 70 ½, the taxpayer must start taking “required minimum distributions” out of the taxpayer’s traditional IRA.  The required minimum distribution is typically taxable income to the taxpayer.  However, if the taxpayer utilizes the IRA Charitable Rollover, the amount given to the charity counts as part of the taxpayer’s required minimum distribution, but is not taxable income to the taxpayer.  This is a big benefit, especially if the taxpayer does not itemize deductions.   

Even for taxpayers who do itemize, the IRA Charitable Rollover can still save the taxpayer more tax than taking the IRA distribution into income and then donating it.  For example, by donating IRA funds directly to the charity from the IRA, the taxpayer lowers adjusted gross income.  This, in turn, may keep other income from being subject to the 3.8% net investment income tax.  It can also eliminate high-income premium surcharges for Medicare.

For taxpayers who must take a required minimum distributions and do not itemize, the IRA Charitable Rollover is a no brainer.  It will reduce tax for charitable gifts in which the taxpayer may not otherwise receive an income tax advantage.  For taxpayers who itemize, the IRA Charitable Rollover can still be of benefit as cited above.  The transfer process to complete an IRA Charitable Rollover is quick and requires minimal paperwork.  The key is to ensure that the check from the IRA is made out to the charity.  Contact your tax preparer or attorney to see how the IRA Charitable Rollover may benefit you.


For more information on how to maximize your charitable giving under the new tax law, click here.

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