Getting the Jump on Tax Reform

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Now that the House has passed its version of tax reform, the tax code is one giant step closer to its most significant overhaul in a generation. The Senate is expected to begin debate in earnest next week when they return from their Thanksgiving break. Though challenging differences separate the House and Senate, it is beginning to look very possible that the President could have a bill on his desk by year-end. Even if it gets delayed until next year, it is likely that any tax bill enacted in 2018 will be retroactive to the beginning of the year. This means that you may want to act now to capture some of the current tax benefits that may be unavailable to you in the very near future.

One such benefit is the deduction for charitable contributions. Although charitable contributions will be deductible under the new tax law, the larger standard deduction will mean that fewer people will find it advantageous to itemize their deductions. If it doesn’t make sense to itemize your deductions next year, you will lose the tax break for your charitable contributions.

If the final law follows the House plan, the standard deduction will be raised to $24,000 for married taxpayers filing jointly, or $12,000 if you file as a single taxpayer. Two itemized deductions will remain: charitable contributions and interest payments on mortgage debt. If your mortgage interest payments plus your charitable contributions don’t exceed $24,000, it won’t make sense to itemize deductions.

If you anticipate making charitable contributions in the next few years, but don’t expect that your itemized deductions will exceed the standard deduction, you may want to accelerate some of your giving into 2017 before the new tax legislation goes into effect. A donor-advised fund can help make this happen.

A donor-advised fund is an account you hold at a sponsoring non-profit organization. Contributions to your donor-advised fund are a charitable gift to the sponsoring organization. However, the sponsoring organization gives you the ability to direct future gifts from your account to other non-profits.

Here’s how it would work in this situation. Let’s suppose you are a married taxpayer and that you anticipate making charitable donations of $4,000 in 2018. Suppose further that you expect to pay $7,000 in mortgage interest. Under tax reform, your total itemized deductions for 2018 would be $11,000, well below the $24,000 standard deduction. When you file your 2018 taxes, you will take the standard deduction and you will lose the deduction for your charitable contributions.

Suppose instead that you take the $4,000 you expect to donate next year and contribute it to a donor-advised fund by the end of 2017. By accelerating your contribution into 2017, you capture the full tax deduction for your donation this year—a benefit, in this example, that could be worth as much as $1,500, depending on your marginal state and federal tax rates. If you don’t accelerate your contribution into this year, that benefit will evaporate when the new law is passed.

Whether this strategy works for you depends on several unique considerations, including your marginal tax rate and your charitable intent. In any case, it is worth a conversation with your financial advisor.


Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to