What tax rate will your deduction be saving you this year vs. next year?
In order to determine this, you will want to understand what makes up your basket of taxable income. Does one year consist mostly of long-term capital gains or qualified dividends that are taxed at a lower rate than wages, SE income or retirement plan distributions? Additionally, what tax bracket are you expecting to be in? If you’ve had a high income year in 2016 that will push you into the top tax bracket but expect only to be in one of the lower brackets in 2017, then it’s better to take that deduction now and offset your high tax.
What portion of your deductions will be lost to limitation?
Under the PEASE adjustment, the IRS limits your overall deductions if your income is over a certain amount. So if your 2016 income is expected to be $1 million but 2017 is expected to be $3 million, the charitable contribution taken now will provide a much better benefit since your deductions will be subject to much greater limitation in 2017.
How might tax policy change under the new administration?
While none of us have a crystal ball, history tells us that a new president will be able to pass some level of tax reform within the first year in office. In this case, expected changes would be effective for 2017. Republican strategies in this area have included lower tax rates across the board and also limiting deductions for high-income earners. Both of those changes would lead to charitable deductions in 2016 being much more valuable than after the new tax reforms.
As with many areas of tax planning, the question of when to make your charitable contributions can be difficult to answer. Contact a professional to help guide you through year-end planning and make the most of your deductions.