January 2, 2018
See below for a detailed summary of recent tax changes from our friends and partners at RegentAtlantic.
The recent tax law changes were the most disruptive changes to the tax code in more than 30 years. The most impactful changes to personal income tax were the elimination and limitation of most major itemized deductions. At the end of the day, most individual taxpayers are limited to just a few deductions:
- Charitable Contributions
- Mortgage Interest
- Medical Deductions (applicable over 7.5% of Adjusted Gross Income)
- State and Local Tax (SALT) Deduction (limited to $10,000 total income and property tax)
To counteract the limitations and eliminations of many itemized deductions the new tax law expands the standard deduction (given to all taxpayers regardless of their actual deductions) to $12,000 for individuals and $24,000 for those married filing joint.
This means that fewer folks will be itemizing going forward. For those with no mortgage interest or medical deductions, their deductions are really limited – $10,000 SALT deduction and their charitable deductions. As a result, for clients who are regularly placing funds into a Donor Advised Fund, it may make sense to consider bunching together their contributions rather than contributing on an annual basis.
Let’s use the following example to explore how this may be beneficial. A retired married couple typically donates $15,000 annually to their Donor Advised Fund. Their mortgage is paid off and they have little in the way of medical expenses. As you can see below, if they continue in their annual routine, their deductions total about $25,000 annually for a total of $100,000 in deductions over the four year period.
|Total Itemized Deductions||$25,000||$25,000||$25,000||$25,000|
Remember, the Federal government is providing a $24,000 standard deduction to all married tax payers. This is regardless if they make charitable contributions or pay SALT like our retired couple. Since our married couple is just exceeding that they are only seeing a $1,000 increased deduction for their $15,000 charitable contribution – not much of a tax benefit.
Bunching together charitable contributions
Bunching together those charitable contributions every other year and taking the standard deduction in the off years allows that couple to receive a greater tax benefit from their contributions. As illustrated below, rotating the contribution every other year results in total deductions over this four-year period of $128,000, while they would receive only $100,000 of deductions following their old routine and their charitable contributions remain at the same level.
|Total Itemized Deductions||$40,000||$10,000||$40,000||$10,000|
Leveraging a Donor Advised Fund
This type of strategy makes leveraging a Donor Advised Fund even more attractive. You can donate funds in one year and receive the deduction in that year. But you have the opportunity to grant them in future years.
Folks who are taking Required Minimum Distribution’s from their IRA’s may also look to see if a Qualified Charitable Distribution makes more sense given the tax change in 2018.
To learn more about how a strategy like this might help your situation feel free to reach out.
Important Disclosure Information
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article does not substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions. They may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases. Please remember that RegentAtlantic does not provide tax advice. Please consult with a tax professional of your choosing prior to implementing any of the strategies discussed in this article.