(From the Jewish Federations of North America (JFNA) about how to make the most of your year-end giving.)
Year-end is an opportune time to consider financial and tax planning strategies. The enactment of the 2017 tax cut legislation last December makes year-end planning this year more important than ever. The tax cut legislation effected significant changes, such as lowering tax rates and, at the same time, reducing or eliminating some tax deductions, credits, and exclusions. Taken together, these changes could dramatically impact your tax liability for the year. As a result, we encourage you to review your withholding and estimated tax payments before year-end to ensure there are no surprises when tax returns are filed on or around April 15th.
Income Taxes: Last year’s legislation retained the seven tax brackets that apply to individual income but lowered the top tax rate to 37 percent. In addition, the legislation lowered rates for several of the middle-income tax brackets. These rate changes will produce a lower effective (or average) tax rate for many, but due to changes in the way that taxable income is calculated (see below), your total tax bill may not go down.
Perhaps the most significant change in the new tax law is the doubling of the standard deduction and the elimination of personal exemptions. For 2018, the standard deduction nearly doubles to $12,000 for individuals and $24,000 for married couples filing jointly. At the same time, a number of commonly-claimed itemized deductions have been reduced or eliminated, with the most important being the imposition of a $10,000 limit on state and local taxes for both individuals and married couples. The itemized deduction for home mortgage interest is retained (although generally limited to loans of $750,000 or, if you are married filing separately, $375,000) as is the charitable contribution deduction. As a result, it is expected that the number of taxpayers who will itemize their deductions will fall dramatically from approximately 33 percent of all filers to less than 10 percent. It is imperative that you compare the total amount of itemized deductions available to you under the new law with the increased standard deduction amount. Year-end planning decisions can turn on this comparison.
Bunching: If you claimed itemized deductions in the past, you may now want to consider “bunching” those deductions into one year in order to exceed the standard deduction amount and claim the standard deduction in other years. Perhaps the easiest itemized deductions to bunch are for charitable contributions. One way to accomplish this is to combine tax-deductible contributions that would otherwise be given in two or more years into one. Another 2017 tax law change that increased the annual cap on cash contributions to charity from 50 percent of adjusted gross income to 60 percent can make “bunching” even more attractive.
Investment Assets: Year-end is an opportune time to review your investment portfolio and consider timing the recognition of capital gains and losses for assets held long-term - more than one year - and short-term. The top income tax rate on long-term capital gains remains at 20 percent. ( a 3.8 percent tax on net investment income could also apply). Part of your capital asset review could be consideration of a gift of appreciated securities to charities. You can avoid paying any capital gains tax on the value of securities transferred to the Federation/Foundation, and you may be able to receive a charitable contribution deduction for the full fair market value of the securities at the time of the gift.
IRA Charitable Rollover: Over the past ten years, many individuals over age 70 ½ have utilized the IRA charitable rollover to transfer up to $100,000 each year from their IRAs directly to public charities, such as the Jewish Federation. Qualifying direct distributions may count against the minimum required distribution amount. (Note: transfers to DAFs, supporting organizations, and private foundations do not qualify for this tax benefit.) An IRA Charitable Rollover is not deductible, but because it is not included in gross income, the net effect may be the same as it would have been had you made a charitable contribution. As a bonus, you do not have to itemize to get the tax benefit of your gift, so you can still claim the higher standard deduction under the 2017 tax law changes.
Estate Taxes: Several provisions in the 2017 tax law operate to provide new opportunities for estate and gift tax planning and encourage lifetime giving to family members and others. The estate tax exemption amount has doubled to over $22 million for married couples, greatly reducing the number of estates that will be subject to tax. The annual gift tax exclusion has been increased to $15,000 per recipient, ($30,000 if the spouse joins in the gift). The bottom line is that this is an opportune time to review estate planning documents including trust agreements and wills.
Should you have any questions regarding your gift to Federation, please contact Marci Gordon at 408-357-7503. Thank you for all you do to support the Jewish Federation of Silicon Valley.
This letter 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.