“Let our advanced worrying, become advanced thinking and planning”.
-  Winston Churchill; 1874-1965

The U.S. House of Representatives (November 16, 2017) and the Senate (December 2, 2017) each passed their own version of “The Tax Cuts and Jobs Act”.  With completion of the reconciliation process, the final version includes several provisions that warrant attention and possible advanced planning.

Key Elements to Tax Bill

  • The deduction for state and local income taxes, combined with property taxes, will be capped at $10,000.  
  • The deduction for mortgage interest would be capped at loans of $750,000.  The plan grandfathers existing loans but would apply to new loans.
  • The deduction for interest paid on a home equity line of credit will be repealed until 2025.
  • The deduction for miscellaneous itemized deductions that exceed 2% of adjusted gross income has been repealed.
  • The plan will eliminate the personal exemption but will raise the standard deduction to $24,000 ($12,000 for single filers).

Impact for California Taxpayers

  • The median house along the California coast exceeds $1 million (Trulia.com).  Property tax rates of approximately 1.1% per year would generate property taxes that exceed the $10,000 proposed cap.   This will generally reduce itemized deductions for California taxpayers.
  • The standard mortgage on a $1 million home, using 20% down, is $800,000, a figure that exceeds the $750,000 cap on mortgage interest deduction.  According to Core Logic, home equity loans in California alone exceed $10 billion.
  • California has high state income taxes.  Any constraint on the ability to deduct state income taxes will generally reduce itemized deductions for California taxpayers.
  • Combined, these will all serve to reduce the level of itemized deductions, for California residents.
  • Increasing the standard deduction to $24,000 means that taxpayers must have more than that figure in deductions, or they are given a uniform deduction of $24,000 without having to account for individual items.

Deducting Charitable Donations

  • Under the current proposals (subject to change), many individuals will no longer itemize and are therefore at risk of losing tax deductions for charitable contributions.  
  • Because the rules will become effective in 2018, individuals should consider bunching charitable contributions in the remaining weeks of 2017.  
  • You should consult your own tax professional to confirm that these rules impact you personally.

Donor Advised Funds (DAF)

The DAF offers an attractive set of features in light of current circumstances.  A contribution is made – this can be cash, but appreciated securities are a better alternative.  An immediate tax deduction is created, thus satisfying the desire to front-load contributions in the 2017 calendar year.  However, the DAF can hold the funds for future gifts to the charity of your choice. The actual gifts can take place over multiple years.

Donor Advised Funds

(National Philanthropic Trust)

The DAF accomplishes the following:

  • Accelerates several years of charitable giving into 2017.
  • Eases the administrative burden of tracking contributions by consolidating into a single transaction.
  • Facilitates the gifting for an unlimited number of years going forward by simply requesting that the DAF send money to the charity of your choice.
  • The DAF does not increase your charitable budget, it simply impacts the timing of the deduction (accelerates) and the actual gifts (over time).
  • There is no requirement to make annual gifts out of the DAF.
  • Funds not given as grants can continue to stay invested and grow.
  • $22.6 billion was contributed to DAFs in 2016. (National Philanthropic Trust)

Donor Advised Funds are offered by Charles Schwab, Fidelity, The Santa Barbara Foundation and the San Diego Foundation.  

We strongly encourage you to discuss the feasibility of bunching your charitable contributions into this calendar year with your C.P.A. and reaching out to us as soon as possible to help implement.