New Tax Law Update

6 Things You Thought You Knew About Income Taxes

1. The top tax rate for dividends and long-term capital gains taxes is 15 percent.

FALSE. The computation of the Alternative Minimum Tax (AMT) puts some taxpayers into what is known as the “phase out zone” where some deductions are reduced in value. For these taxpayers, the effective long-term capital gains rate may be as high as 22 percent.

Charitable solution. Gifts of appreciated assets, prior to their sale, yield an income tax charitable deduction for the current fair market value of the asset and completely eliminate long-term capital gains tax liability.

2. Tax-exempt income (from municipal bonds, for example) is never subject to income tax.

FALSE. Income reported on line 8(b) is excluded when determining one’s adjusted gross income. However, if you have Social Security income, tax-exempt income is included in determining whether you owe tax on Social Security income.

Charitable solution. A charitable gift annuity provides annual annuity payments to the donor, a portion of which is tax free. The tax-free portion is never included in any tax calculation.

3. If my standard deduction is greater than the amount of my itemized deductions, I should always take the standard deduction.

FALSE. You should run your taxes using both the standard and itemized deductions. Although the standard deduction will be better using standard tax calculations, the preserved itemized deductions may actually lower the AMT.

Charitable solution. Unlike some itemized deductions, charitable gifts are deductible under both standard tax and AMT calculations. Therefore, even where other deductions are not helpful under the AMT, charitable deductions may continue to reduce your tax liability.

4. Itemized deductions are only available for the year in which the deduction occurred.

FALSE. Most, but not all, Schedule A deductions are “use it or lose it.” In other words, they are only deductible in the year they are incurred.

Charitable solution. Charitable gifts that exceed thresholds related to adjusted gross income may be carried forward for an additional five years and reported as itemized deductions.

5. You cannot deduct personal expenses related to charitable giving.

FALSE. It is true that you may not deduct the value of your time. However …

Charitable solution. Expenses directly related to performing charitable services are often deductible. For example, driving expenses incurred while volunteering may currently be taken as an itemized charitable deduction at 14 cents per mile.

6. You cannot take a charitable deduction for assets you continue to use.

FALSE. There are exceptions to the general rule that you must actually part with assets to get a deduction.

Charitable solutions:

• You may give your home (and some other kinds of real estate) to charity with a reserved life estate. You receive an immediate income tax charitable deduction for a portion of the property's value and continue to live there for the rest of your life.
• You may take out a charitable gift annuity that provides an immediate income tax deduction and provides annuity payments to you (and your spouse) for life.
• You may establish a charitable remainder trust that provides an immediate income tax deduction, and provides income either at a set or variable rate for either a term of years or for your life (and that of others).