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Richard Rider

URGENT! Here’s CRITICAL California year-end tax planning guidance

With the amazing tax reform package finally passed, people of means — even of modest means (ESPECIALLY those of modest means) — need to consider taking some tax-saving steps NOW before 2017 is over.  These steps are particularly important for my biggest demographic audience — Californians.

Below is an excellent article (one of many such articles) with major tax-saving suggestions.

But the two strategies that I want to focus on here are:

1.  Paying your property and state income taxes before 31 December.

2.  Double or triple your charitable contributions before the end of the year (and not pay any next year).  Or be even more clever than that (read on).

First the good news.  Contrary to what the media has been telling us, MOST of us WILL pay lower federal income taxes in the next few years –at least through 2020.  After that, it’s more and more likely that D.C. goes back into their preferred tax-raising mode.

The new law’s bigger standard deduction coupled with lower federal income tax rates results in the VAST majority of Americans facing lower tax bills in the coming years. Of course, that fact has been misrepresented by the media, and blatantly denied by the biggest liars in political office (a.k.a. Democrats).  But the truth is starting to become apparent.

Now to tax planning.  Many middle class and upper-middle class couples may find that their annual itemized deductions will be less than the $24,000 annual standard deduction.  While that’s a GOOD thing (you don’t have to itemize), it can cost you unnecessarily if you don’t do some planning.  Moreover, the federal income tax brackets for most Americans are higher this year than they will be next year.

The key in California is whether or not you have a big mortgage (over, say, $300,000). With a big mortgage coupled with other deductions, you may well exceed the $24,000 standard deduction, which means that some of your itemized deductions (those over $24K) will be deductible on your federal income tax return — over and above the standard deduction.

Here’s one of several federal income tax calculators now available that reflect the new law. It’s a simplified calculator, but probably adequate for most people’s situation.  If your tax return is really complicated, perhaps professional tax advice is in order.  Trying this calculator with various options is well worth doing.

For many people, it would be wise to pay their property taxes before the end of 2017 — rather than waiting until spring to make the final payment (in California, at least).  Also for many, paying the full amount of any state income tax due for 2017 by December 31 is a good strategy.  These strategies are getting widespread attention, and rightly so.

But here’s the one tax strategy that merits particular attention.  If you give even modest amounts of charitable contributions and (up until now) file an itemized tax return, seriously consider “prepaying” your 2018 contributions in 2017.  Perhaps even 2019 and 2020 contributions as well!  This is important if you think that in 2018 you calculate that you will not be itemizing (because of the bigger standard deduction).

This strategy can be painful, but for many, WELL worth it. In essence, you may well get a 30% or more tax savings by giving to charities before the end of this year.

A Facebook friend suggested a better way of doing this:  Before the end of 2017, open a “donor-advised” charity account at a brokerage firm offering such a service.  YOU control the fund!  Put a slug of money (better yet, appreciated assets) into the fund, taking a full charity write off in 2017 (up to half your AGI).  You get all the deductions the year you contribute, and the growth is tax free while you wait to dole it out, but you’ll never be able to benefit from withdrawals.  Instead, you get to dole out charity contributions to your favorite 501(c)(3) recipients for the next few years.

Indeed, I set up this very plan TODAY with Fidelity Investments.  I can dole out the money to charities with online instructions, and control the investments as well.  Fidelity has offices you can go to set up the account — a good idea with this end-of-the-year crunch.

I chose to put it all in an index fund having the AMAZINGLY low annual expose ratio of  0.015% a year.  To have such a brokerage account, you have to pay annual fee of 0.6% a year or $100, whichever is greater — which in this case I consider quite reasonable for the service.  And you can open an account with as little as $5,000.

Schwab has the same deal.  Vanguard offers the service, but is more expensive.   Some brokerage firms such as TD Ameritrade do not offer this service.

Works for me! As geezers, my wife and I have paid off our mortgage.  So our only significant deductions are our state and local taxes — and our charitable giving.  Usually we itemize.  But not so in future years, it appears.

Remember that property and state income taxes are capped as a deduction at $10,000 total a year.  While my wife and I give charities thousands of dollars annually, with our restricted cap on deducting taxes, we won’t hit the $24,000 standard deduction mark.  So we have decided to make one big charitable payment NOW.  Probably our future annual charitable contributions will be about the same as our “usual” giving amounts. I put in enough in my Fidelity charity fund to cover about 5-6 years giving.

The charities know what is happening with this tax law.  IF you are doubling down this year and not contributing to future years, you might want to send a form letter with your windfall contribution to make clear to them that your largess ends (for two-three years).

Logistically this is going to be an annoying change. But it can save literally thousands of dollars, so you should bear your paperwork burden gladly.  I know I will!

BTW, if you use a donor-advised account, all the transactions don’t matter for tax purposes.  You can carve out amounts to donate to charities without tax record concerns.  That removes a potential major headache.

Time is short. You must act NOW, if your economic circumstances justify these moves.  No procrastination allowed.

Seasons Greetings!  Now get to it.