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Several expected changes to the U.S. tax code are generating plenty of conversation. While a simplified tax code and reductions in corporate tax rates are two changes that will certainly benefit individuals and businesses, potential restrictions on itemized deductions will likely create challenges for some individuals and entities.
We generally avoid discussing tax code changes before they become effective as to reduce confusion and alarm. But some conversations matter more than others. Although I will be shocked if some proposed changes to charitable giving are actually passed, charitable gifting deductions could be on the chopping block.
Tax code changes that are challenging for the tax payer generally become effective up to the date the legislation is passed or later. If tax code changes benefit tax payers, sometimes the legislation is retroactively applied to the beginning of the year. Assuming charitable deductions are removed from itemized deductions (Schedule A of your 1040), these deductions would probably be allowed through the end of the year. But as charitable contributions have been part of the modern tax code since its ratification in 1913, a comprehensive repeal of charitable gifting is hard to imagine.
There are gifting and taxation issues to consider even if the IRS doesn’t remove the deduction for charitable gifts. Those of us who are charitably oriented and expect to retire in a lower tax bracket need to think about how itemized deductions will impact the timing of our gifts and our taxes. Utilizing a Donor Advised Fund may be right for you. Please consult your tax planning professional before implementing this or any tax strategy.
If your marginal bracket does indeed decrease – for the record, that is a false belief held by many tax payers – then making extra gifts today increases the amount you are able to deduct today and at a potentially higher tax rate. The higher your marginal rate, the more valuable charitable deductions become, assuming your income is not high enough to phase out the deductions. If you are in the 25% marginal bracket today and expect to retire in the 15% bracket, each gift made today is worth $.10 more in terms of reducing taxation.
You can make an argument that adding to a Donor Advised Fund is an offset to additional IRA or 401k contributions. Keep in mind this only pertains to the federal tax rate, but if I defer $10,000 of income into my 401k, I reduce my taxation by my marginal tax rate on the $10,000 contribution. If I made the charitable contribution to a Donor Advised fund for future use, I would receive a similar reduction in taxation. While many factors come into play, this strategy should be seriously considered by those individuals who plan to retire in a few years at a lower marginal tax bracket, plan to make charitable gifts during retirement and expect to retire before age 70.Tax planning is a combination of many factors, but it always requires us to consider the future.
Tax advice provided by CPA’s affiliated with Financial Enhancement Group, LLC.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]