With tax reform on the horizon, you should be thinking even harder about whether to accelerate your charitable contributions by the end of 2017. According to the Tax Foundation, approximately 25 percent of Americans itemize their charitable giving as a deduction on their federal tax return, with the average charitable deduction averaging close to $6,800 last year.
Under the new proposed tax reforms, many of the federal tax deductions that have been allowed in the past are being reconsidered -- either by being reduced, or by having limitations put on them or being eliminated altogether. So the safest approach to take with many deductions is to assume that reform will be effective on Jan. 1, 2018.
With the year end fast approaching, here are a few reasons of why you might want to act now in this 2017 tax year to maximize your charitable giving deduction before tax reform happens.
If the standard deduction gets doubled, fewer people will itemize: The current tax code allows for a standard deduction of approximately $12,000 for married couples and $6,000 for single filers. The new proposed plan increases the standard deduction to $24,000 for families and $12,000 for single filers. If that happens, fewer people will itemize because they're getting a bigger standard deduction. Most Americans will be better off claiming the larger standard deduction, which will offset the proposed elimination of most other deductible items. But this year, you can still itemize, so you will want to make every possible charitable contribution that you can to maximize your deductions.
If the tax rate drops, the value of an itemized deduction will be lower in future years: If the tax rate drops, as they are proposing, the value of your charitable giving deduction will be less in the future than it is right now. Again, you'd be better off making that charitable contribution this year vs. next year.
If you are currently over 70½-years-old, you can use part of your RMD for charitable giving: If you are currently over 70½-years-old, you must take a required minimum distribution (RMD) from your traditional and SEP or SIMPLE IRA accounts each year under our current tax code. A tax provision that is fairly new and little known is that you can use part of this distribution and send it directly to charity. This applies whether you itemize or not. Most people don't know about this, because over the past couple of years, Congress has been inconsistent about allowing this provision. As a result, you couldn't plan effectively. This provision is now permanent, so you can designate some of your distribution to charity and get a charitable contribution deduction, even if you don't itemize.
You can use appreciated stock as a charitable giving deduction using its fair market value: One of the biggest mistakes people often make in their charitable giving is that they think they need to write a check, or give cash, to charity. If you have a stock that has increased in value since you purchased it, and you have held it for a year, instead of selling it and paying taxes on that gain, why not can donate the stock to charity? You will be able to claim that stock's current fair market value at the time that it is donated for your deduction, and not have to pay any capital gains tax on that stock. It's a relatively simple process and is typically arranged through your broker. You could also do it yourself by going online and getting a stock transfer form through financial company websites where your stock is held.
However, if the stock has decreased in value from its purchase price, don't donate that stock! In that case, you would want to sell the stock first, claim the loss as a tax deduction and then give your charity the cash.