As we work with our clients on year-end tax planning we are continually asked when is the best time to make a charitable contribution. This year, with President-elect Trump’s proposed tax reform there is an argument for accelerating charitable contributions in 2016. However, it depends on each individual’s tax situation. First, some background.
The tax benefit derived from a charitable contribution is, in large part, determined by the marginal income tax bracket the taxpayer is in. Under the current federal income tax system, the highest marginal income tax bracket can be as high as 43.4% or even 46% if you consider the phase out of itemized deductions and personal exemptions. This means a $10,000 charitable contribution costs the taxpayer $5400 because the federal government is covering $4600 in the form of tax savings.
Under the President-elect Trump tax plan, the highest marginal individual income tax bracket would be reduced to 33% and business income would be taxed as low as 15%. Therefore, under the Trump plan, the amount of the donation is shared $6700 by the taxpayer and $3300 by the federal government. A difference of as much at $1300.
In addition, the Trump plan would limit itemized deductions to $200,000 for taxpayers’ filing a joint return and $100,000 if the taxpayer files a single return. So, if a taxpayer has itemized deduction in excess of that amount, any additional charitable contribution would generate no additional tax savings.
There are no provisions in the Trump tax plan that indicate a charitable contribution would be worth more in the future than it does now. As a result, it may be more beneficial to make your charitable contributions in 2016 than in the future.
The federal income tax system is very complicated and everyone’s tax situation is unique, so you should consult with your tax advisor before implementing any tax strategy.