Due to changes brought about by the new tax law, some charitably-motivated clients may wish to act now to make the most of the charitable deduction
Author: Jonathan Blattmachr Editor-in-Chief, InterActive Legal
The Tax Cuts and Jobs Act of 2017 (the "Act"), signed into law on December 22, 2017, makes sweeping changes to U.S. tax law. The Act touches on almost every aspect of tax law, including the estate and gift tax. The amount of the basic exclusion from estate tax is increased from $5 million to $10 million, which, adjusted for inflation, means that decedents dying in 2018 will have an $11.2 million exclusion from federal estate tax. Unlike prior versions of the legislation, the final Act does not provide for the ultimate repeal of the estate tax. Instead, it includes a "sunset" for the increased estate tax exemption, by providing that the increased basic exclusion amount applies to estates of decedents dying before January 1, 2026.
Estate planners will need to act over the next several months, to advise clients of the impact of the new tax law on their estate plans, and of possible ways to take advantage of the increased exclusion amount, prior to the sunset date. However, attorneys can also benefit clients who are charitably-motivated, by advising them of a technique for potentially preserving the income tax deduction for charitable contributions. This technique, outlined below, requires urgent action, as it must be completed by the end of the year.
In addition to the changes to the federal estate and gift tax rules, the Act makes substantial changes to the federal income tax, and the deductions against that tax. Current tax law permits a number of deductions for expenses and other items, including state and local taxes, as well as charitable contributions. Accordingly, many taxpayers "itemize" deductions, rather than taking the standard deduction, which is currently $12,700, for married couples filing jointly. The Act substantially limits the deductions against income tax, so that, for the majority of taxpayers, the only available deductions will be the deduction for charitable contributions, the deduction for mortgage interest (which is now limited to mortgage debt not in excess of $1 million), and the deduction for state and local taxes. In addition, the Act limits the deduction for state and local taxes to $10,000. However, the Act also raises the standard deduction, so that in 2018, a married couple filing jointly may take a standard deduction of $24,000 (after adjustments for inflation). This increase is also scheduled to sunset as of January 1, 2026.
Due to these changes, many taxpayers will find that their itemized deductions, including deductions for charitable contributions, are lower than the amount of the standard deduction. Accordingly, those taxpayers will take the standard deduction, and will not receive any additional tax benefit for charitable contributions made in that year. However, those same taxpayers will likely still find it beneficial to itemize deductions for the 2017 tax year, and will receive a tax benefit for charitable contributions made in 2017 (assuming they do not exceed the limitations on the charitable deduction under Section 170 of the Internal Revenue Code).
For those taxpayers who intend to make charitable contributions over the next eight years, it may be more beneficial to make those charitable contributions, in one lump sum, before the end of the year, allowing them to take advantage of the charitable deduction against their 2017 income tax for contributions that otherwise would have occurred in subsequent years. One way to accomplish this, is by making a contribution to a donor-advised fund, some of which now provide for easy contributions through online enrollment. The extent to which this planning idea will benefit any particular client requires careful analysis of the client's likely income tax liability and deductions, as well as the client's charitable intent, and financial situation. However, for the right clients, it may allow them to fulfill their charitable goals in a way that provides some additional financial benefit to the client. For those clients, your advice regarding this technique will be very valuable, but you must act now, to reach out to those clients and ensure that any charitable contributions are completed before the end of the year.
Jonathan Blattmachr is a Principal in InterActive Legal, serving as its Editor-in-Chief and Co-Author of its cornerstone products, Wealth Transfer Planning™ and Elder Law Planning™. A retired Partner in, and former leader of the Trusts, Estates, and Exempt Organizations section of, the New York law firm Milbank Tweed Hadley & McCloy LLP, Mr. Blattmachr is recognized as one of the most creative trusts and estates lawyers in the country and is listed in The Best Lawyers in America. He has written and lectured extensively on estate and trust taxation and charitable giving. Mr. Blattmachr is also widely respected for his dedication to always sharing his expertise and ideas with other lawyers, as well as mentoring less seasoned lawyers. These contributions are recognized in his receiving The Hartman Axley Lifetime Service Award.