Month: October 2019

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Year-End Income Tax Planning – Itemized Deduction Planning: “Bunching”

The 2017 Tax Act: The act significantly changes itemized deduction planning, making it very simple for some and more daunting for others. Most know the overall rules by now. But it doesn’t hurt to be reminded.

Two biggest changes:

1. Much higher standard deduction (adjusted for inflation annually).

For 2019: $24,400 for married couples filing jointly (plus $1,300 for each spouse attaining age 65: max $27,000)), $12,200 for unmarried individuals/married filing separately (plus $1,650 if attaining age 65 ($1,300 if married filing separately: max $13,850 if single (max $13,500 if married filing separately)), and $18,350 for head of household (plus $1,650 if attaining age 65: max $20,000).

For 2020: $24,800 for married couples filing jointly (plus $1,300 for each spouse attaining age 65: max $27,400)), $12,400 for unmarried individuals/married filing separately (plus $1,650 if attaining age 65 ($1,300 if married filing separately: max $14,050 if single (max $13,700 if married filing separately)), and $18,650 for head of household (plus $1,650 if attaining age 65: max $20,300).

2. The Itemized Deduction computation now has an important and costly limitation. State and local taxes that are deductible in a year are limited to $10,000 (not adjusted for inflation) ($5,000 if married filing separately). These state and local taxes (“SALT”) are primarily property taxes, state income taxes (so could time property tax and estimated state income tax payments if total annual SALT fluctuates above and below $10,000, maybe because of buying or selling a home), and, for some states (such as Arizona), vehicle license tags tax portion.

Itemized deductions for most taxpayers (who still have benefit from itemizing) often consist primarily of: mortgage interest (but for new mortgages, limited to interest on $750,000 of principal balance of primary residence only; $375,000 if married filing separately), charitable contributions and $10,000 of state and local tax. So many have a greater standard deduction, and will no longer itemize.

Bunching of charitable contributions and large uninsured medical expenses (to the extent they would exceed 10% of adjusted gross income into one year) could yield a benefit if that would push itemized deductions over the standard deduction for a year. Changing the date of a mortgage payment at year end could move another month’s interest into a “bunching year.”

With the standard deduction at a new high (for 2019 as high as $27,000 for older married couples filing jointly (in 2020 as high as $27,400)), the itemized deduction may offer no benefit, when it had in the past. Also for many more potential or actual homeowners who now don’t itemize, there is no tax subsidy in home ownership. For many others who do, property taxes may now not be subsidized in whole or in part.

Old rules scheduled to return: But don’t completely forget the old rules. In 2026 the standard deduction rules will revert to what they were before the 2017 Tax Act. For example, among other things, the standard deduction for married couples could be around $14,500 (estimated for inflation adjustments), and itemized deductions will have no SALT limitation and will include miscellaneous itemized deductions and phase outs of deductions for higher income taxpayers nixed by the 2017 Tax Act.

For more information on this week’s Pre-Halloween Tax Tip, please contact Les Raatz at x5022 (602-285-5022) or another member of our Estate Planning or Tax Practice Group who haunt Dickinson Wright.

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Doing Well By Doing Good

Lifetime charitable giving, properly planned, may afford income tax savings. Under current federal income tax law, the income tax charitable deduction is available to taxpayers who itemize deductions rather than take the standard deduction. The standard deduction is $24,400 for a married couple, filing jointly in 2019 and half that amount for a single individual. Given the amount of the standard deduction and the $10,000 cap on the deductibility of state and local income and property taxes, the charitable income tax deduction is useful in years when a taxpayer can afford to be generous. For example, a taxpayer may consider making one or more substantial charitable gifts in a single year when the taxpayer will itemize deductions by establishing a donor advised fund with a financial institution, favorite charity or community foundation. The taxpayer then can itemize and take the charitable deduction in a single year when the gift is made but can recommend grants out of the donor advised fund to favored charities over the course of several years.

To learn other tax efficient ways to give to charity, contact Henry Grix in the Troy, Michigan office at 248-433-7548 or another DW trusts and estates or tax lawyer.

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Beneficiary Designations

ATTENTION TO DETAIL! You would think that this space need not be taken up with a reminder of the obvious importance of beneficiary designations for life insurance policies and retirement accounts (qualified and non-qualified). But those of us who practice in the trusts and estates area are frequently reminded, through painful experiences with clients, that this topic is always relevant and often overlooked by clients and their financial advisors. Here is a checklist: (i) confirm that you have completed a beneficiary designation for every policy and account that is distributed by a beneficiary designation (v. your Last Will) at your death; (ii) confirm that the content of the beneficiary designation is consistent with your overall estate plan; (iii) keep copies of all of your beneficiary designations in a single file (digital or paper) and periodically review all of them, especially if there has been a change in your family situation (e.g., deaths, births, divorces) and/or estate planning goals; (iv) confirm with your tax advisor that your beneficiary designations achieve the most effective income tax result that is consistent with your overall planning; and (v) insure that changes of beneficiary designations submitted to the insurance company or retirement account custodian by you or advisors are actually accepted and recorded by that financial institution. One popular form of a “beneficiary designation” designed to avoid probate is a “transfer on death” (TOD) designation added to a bank or investment account that causes the account balance to be paid out directly to specifically named individuals and/or trusts. This can be a useful and “simple” technique in appropriate circumstances. But trusts and estates practitioners often discover following the owner’s death, when it’s too late to correct, that the TOD designation is inconsistent with the deceased owner’s overall estate planning goals and/or has avoidable adverse tax consequences. Be smart – pay attention to the details and consult with your tax and estate planning advisors if you have any doubts or questions.

If you have any questions, please contact Henry C. T. (Tip) Richmond, III in the Lexington, Kentucky office at 859-899-8712.