Tax Reform Impact: Do you still need to itemize, and what can you do about your charitable donations?
The biggest tax reform in twenty years was passed on Dec 22, 2017 known as the Tax Cuts and Jobs Act (TCJA). It makes fundamental changes in the way families and businesses calculate their federal income tax bills, and most individual provisions stay in effect from 2018 through 2025.
One of the goals of the law was to lower the tax rate, and simplify the tax code for individuals by introducing a large standard deduction of $24,000 for married couples, replacing personal exemptions and some itemized deductions. The lower tax rate and generous child tax credits ensures a lower federal tax bill for many dual income households with children. However, for some people, especially people living on fixed incomes in higher cost areas, some of these provisions may not be ideal.
Here are some issues to watch out for:
- Capping of state and local tax (SALT) deductions: Deductions for state income taxes and local property taxes, also known by the acronym SALT, will be capped at $10,000. When property values and state taxes are high, the $10,000 cap can cause thousands of dollars of deductions to be left on the table.
- Repeal of miscellaneous deductions over 2% of adjusted gross income (AGI): Till 2017 there was a deduction available for expenses such as financial advisor fees, unreimbursed job related expenses, union dues, and tax prep fees. The new tax law repeals this. This may limit deductions for many people who may pay significant financial advisor and other fees.
- Charitable donations: Charitable donations can still be itemized, and in some cases, the new law is more generous with deductions for cash donations. In spite of this, if the total of all itemized deductions do not add up to more than $24,000 for married filers, donations do not help with taxes. Because of the limitation on SALT and financial advisor fees discussed in (a) and (b), it can be harder to cross the threshold of $24,000.
All is not lost however, and here are a couple of strategies that will help you optimize your deductions.
- Itemizing deductions for alternate years: Property tax payments may be judiciously spread out over two years to take advantage of the full $10,000 in SALT deductions. Charitable donations and discretionary medical expenses can happen in alternate years, creating a high enough itemized deduction amount to overcome the $24,000 threshold. Charitable deductions may also be made out to a “donor advised fund” that can be set up to hold funds if a suitable charity has not yet been identified. California and some
other high tax states offer funds such as the “California Excellence Fund”, donations to which can be used to offset state taxes. Be careful though, because recent IRS guidance has placed some restrictions on the use of these funds for federal charitable deductions.
- Donating to charity directly from your IRA required minimum distribution (RMD): It is possible to donate directly to charity from your IRA prior to the distribution reaching you, so that the charitable donation counts toward your RMD. This strategy has the advantage of providing you with a deduction regardless of whether you itemize your deductions, and of lowering your overall income so that a lower percentage of your social security payments may be taxable.
Finally, there is a dependent care credit of $500 for dependents over the age of seventeen, so make sure to take advantage of this if you are caring for elderly parents or providing support to adult children or relatives.
Sarada Majumder, CPA August 2018