After Trump’s Tax Reform, you're losing a handful of itemized deductions and other deductions have been limited.
If nothing changes, you will be very surprised that your 2018 itemized deduction will be much less than your 2017 and prior years’ amount. First, the mortgage interest deduction is limited to interest on the loan up to $750K; Second, state & local tax deduction has been limited to only $10K;
Lastly, almost all miscellaneous deductions subject to 2% AGI have been removed. In summary, your itemized deduction will be simpler and much less under the new law effective 2018.
Also based on the Tax Cuts and Jobs Act, Provision 11011 Section 199A regarding Qualified Business Income (QBI) 20% deduction, you will not qualify completely when your taxable income (Line 43 of your 1040 tax return) is over $415,000 for married, $207,500 for other.
If you do not plan your tax properly, it is equivalent to losing your hard work earnings by half a year.
What should you do? What’s the solution?
Fortunately, Charitable Contribution in itemized deduction has been kept as before and has no limitation.
Basics of Family/Private Foundation
Private foundations can let you control your Legacy, reduce your income taxes and impact your values to future generations.
There are more than 70,000 grantmaking foundations of all types in the United States. As of 2006, there were 9,059 family foundations in our California. Nearly two thirds of family foundation reported less than $1 million in assets. Foundations in the United States typically are created and organized under state law as not-for-profit corporations and enjoy federal tax exemption under the Internal Revenue code, IRC section 501(c)(3) and controlled by an individual or a family.
Family Foundations provide living donors with flexibility as to the trimming of gifts. For instance, a donor may in one year have particularly high income and wish to take full advantage of the income tax deduction for a cash gift to a foundation (individual taxpayers may deduct up to 30% of their adjusted gross income for cash gifts), without deciding in that same year on the final charitable recipients. In a subsequent lean year, the foundation will have available additional funds for giving that, in the meantime, have been earning virtually tax-free income.
Individuals may deduct cash contributions to a private foundation
* Cash up to 30% of the adjusted gross income (AGI), IRC section 170(b)(1)(B)
**Appreciated stocks up to 20% of AGI, IRC section 170(b)(1)(D).
All contributions specified in a will are fully deductible for estate tax purposes.
Of course, private family foundations must operate according to tax law, including distributing at least 5% of assets each year and paying a 1-2% tax on investment income. However, as part of an overall retirement and estate plan, a private family foundation decreases the amount of taxable assets in your estate. The minimum distribution must be made no later than the end of the following fiscal year. If the total distribution exceeds the minimum required, the excess distribution may be carried over for up to five years. Failure to pay out the minimum results in an excise tax of up to 100% of the undistributed amount.
Under the present law, this 5% qualifying distribution includes occupancy expenses, CPA/Attorney fees, salaries, travel costs, and other reasonable and necessary administrative expenses that the foundations incurs in operating.
You can make gifts to your foundation without affecting the annual gift tax exclusion or the gift tax credit.
With a private family foundation, you can for-generations-to-come involve your family directly in the issues and activities that mean the most to you. Family members can even receive salaries as trustees, directors or employees of the foundation, provided that they legitimately serve in those roles and their work justifies their salary.
Private foundations are required to file an annual return on Form 990-PF, Return of Private Foundation. If the foundation is on calendar year basis, the return will be due May 15th each year.
In the future, the trustees or managers may conclude that the foundation’s purpose has been achieved, or its resources are too small to accomplish what the founders set out to do. Sometimes family members may no longer be interested in running the foundation. In any of these cases, termination can be chosen for their foundations.
For more info, please watch videos:
High Income Tax Planning Strategy with Family Foundation
You can find this video by search: YouTube: Michael Chen, tax planning.