To say that there have been a lot of changes in Washington could be the understatement of the decade; but one change that should be beneficial to taxpayers, in the short term, is the new Tax Reform Act that was passed by congress in December 2017. Not only is this going to lower the corporate tax from 35 percent to 21 percent indefinitely, but it will also be lowering individual and joint marginal income tax rates, as well. Although the tax cuts for individuals sunsets in 2026*, it should provide a well-needed shot in the arm to the American Middle Class.
One other feature that will affect individuals is that the Standard Deduction able to be claimed by individuals, and those filing jointly, will nearly double under the new law. What this means is that it will be much harder to itemize your deductions. For many people, this won’t matter much, because it mainly benefits those who give substantial amounts to charity, and also those who have large mortgage expenses.
2017 Standard Deductions*
| Filing Status Standard Deduction | |
| Single | $6,350 |
| Married Filing Jointly | $12,700 & Surviving Spouse |
| Married Filing Separately | $6,350 |
| Head of Household | $9,350 |
2018 Standard Deductions*
| Filing Status Standard Deduction | |
| Single | $12,000 |
| Married Filing Jointly | $24,000 & Surviving Spouse |
| Married Filing Separately | $12,000 |
| Head of Household | $18,000 |
A strategy that I’m sharing with clients who are charitably inclined is called “bunching.” This, essentially, is where you do two years worth of charitable giving in one year, to ensure that you are able to itemize your deductions that year.
Let me give you an example:
A family may give a certain amount to their church every month during the year. This amount, combined with their mortgage interest, property taxes and other deductible items get them very close to being able to itemize, but doesn’t quite get to the $24,000 Standard Deduction limit. What I would encourage people to do, if it is within their means, is to pull forward all of their giving for the following year into late December of this year. Of course, you would need to have ample cash reserves to do this; but essentially, you would make the following year’s gifts all in December, and then not do your normal monthly giving throughout the next year. The charity would be happy to have those funds in advance, and you would be able to take advantage of itemizing your taxes. In the following year, you are still entitled to the $24,000 Standard Deduction, even though your donations for that year are much lower. So, essentially, if planned for correctly, cheerful givers could do this every other year, systematically, to ensure that they are not losing the ability to deduct their giving.
“Bunching” is a strategy that does not apply to everyone, but for those who are consistent in their charitable giving, this could be a very viable strategy. Talk to your financial advisor or tax preparer about whether it makes sense for you. It could be very beneficial and allow for you to keep more money out of the government’s hands and more in yours, and those of your favorite charity.
I hope, by now, that the cold weather has broken and we are well on our way to a beautiful spring!
*Forbes.com 03/07/2018 – New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More. This is for informational purposes only and should not be construed as tax advice. Consult your tax advisor regarding your specific situation.
