As the House and the Senate try to reconcile the differences in their tax bills and build the similarities into coherent tax law, there are some aspects of current tax law that should be taken advantage of before year’s end.
Charitable Deduction Contributions
Although both versions of the tax bill maintain charitable contribution deductions, there are reasons to accelerate your charitable giving before the calendar flips to 2018. Currently, the standard deduction sits at $6,350 for single tax payers ($12,700 for a married couple filing jointly). If your possible itemized deductions are less than the standard deduction, you are usually better off applying the standard deduction. The new tax bill will most likely have a standard deduction in the $12,000/$24,000 range. If your itemized deductions this year are less than the new higher standard deduction will be next year, it makes sense to accelerate any charitable giving you have planned in order to take advantage of the deduction this year.
It is always a good idea to consider gifting highly-appreciated assets to Charities in-kind. Because you are donating the securities to a charity, you do not pay capital gains tax on the built in gain, but you still get to deduct the fair market value of the securities as your charitable deduction.
For charitable givers worried about cash-flow during the Christmas season, it may be possible to make a charitable donation using a credit card. This will allow you to defer paying off the credit card until early in 2018, but would enable you to take the charitable deduction for 2017, when the credit card was actually charged.
Liquidating Some Investments Under Current Law
Current tax law allows you to identify which asset you are liquidating for basis reporting and capital gains purposes. These rules are known as the adequate identification rules. However, the Senate version of the tax bill repeals the adequate identification rules and replaces those rules with an antiquated accounting method known as “First In, First Out” or “FIFO.” Application of the adequate identification and FIFO rules is as follows: if you bought Amazon stock back in 2000, your basis in that stock would be very low; if you also bought Amazon stock two weeks ago, your basis would be very high. Under current adequate identification rules, you could identify the shares bought 2 weeks ago, choose to liquidate those shares and pay a low capital gains tax or take a capital loss. Under FIFO rules, if you wanted to sell any of your Amazon stock, you would be deemed to have sold the first stock you purchased (i.e. the low basis stock), which would incur a much greater capital gains tax.
FIFO rules can have the same adverse affect when trying to harvest losses at the end of the year. If you anticipate needing to liquidate some securities and/or stock to raise capital for any reason, or if you are considering harvesting stock losses, it is advisable to do so before year’s end, while the adequate identification rules apply.
The tax reform process remains very fluid at this point, and we are keeping up with the changing tides and advising clients on the possible provisions of the new tax code. For now, it is advisable to take advantage of the rules in place until the end of the year. If you have any questions regarding tax issues, real estate issues, or estate planning and probate issues, please do not hesitate to contact me at email@example.com or (772) 234-5500.