The largest grantmaker in the state, Arkansas Community Foundation is a statewide nonprofit organization that offers tools to help Arkansans protect, grow, and direct charitable dollars while learning more about community needs. The Community Foundation engages people, connects resources, and inspires solutions to build community. You understand your clients’ charitable goals. We understand smart giving. Partnering with the Community Foundation, you stay in control of your client relationships while we provide the tools and resources to make the philanthropic process simple, flexible, and efficient.
Here is what is going on and how the proposed changes might affect charitable giving strategies.
Under President Joe Biden’s proposed tax plan, taxpayers making more than $400,000 per year would be taxed at a top income tax rate of 39.6%, an increase from 37% under current law. That would mean charitable giving would become more advantageous under the new law for some taxpayers.
A separate provision in the proposed plan, however, would impose a 28% limit on charitable deductions for taxpayers who make more than $400,000 per year. This would mean that instead of avoiding income tax on charitable gifts at the rate of 39.6% as described above, these taxpayers would escape income tax only at a rate of 28%. (A similar provision was proposed, but never enacted, during the Obama Administration.)
The tax proposal also calls for increasing—from a maximum rate of 20% to 39.6%—the capital gains and dividend tax rates for taxpayers whose annual earnings exceed $1 million. For affected taxpayers, this change would create opportunities to avoid significantly more tax than is possible under current law for gifts of appreciated assets. An increase like this would create a huge incentive for philanthropists to support charitable organizations.
Next, the tax proposal calls for a 3% reduction of itemized deductions for taxpayers making more than $400,000 per year. This is reminiscent of the so-called “Pease Amendment” that was repealed in 2018. Although the reinstatement of this rule could have some negative effects on charitable giving, the rule’s impact would be blunted for taxpayers for whom the reduction is absorbed by other types of itemized deductions (mortgage interest payments, for instance).
Perhaps the component of President Biden’s proposal with the biggest potential impact on ultra-wealthy philanthropists is his intention to raise estate taxes and change the way capital assets are taxed after death.
Currently, the gift and estate tax exemption per person is $11.58 million and $23.16 million for a married couple. These amounts are effectively double what they were before the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA calls for an automatic sunset of these increases on December 31, 2025, at which point the exemption will drop back down to $5 million per person, as adjusted for inflation. Under Biden’s proposed tax plan, though, the estate and gift tax exemption and rates would be restored to the lower levels of more than a decade ago.
In addition, Biden’s proposal calls for substantial elimination of the step up in basis from the taxpayer’s cost to fair market value at the time of death, further complicating existing estate plans for many families. Some philanthropists have deferred charitable gifts to 2021 under the assumption that tax laws will change dramatically.
Despite the uncertainty about exactly what might happen with the tax laws in 2021 and beyond, there are still opportunities for you to advise your charitable clients with conviction that they are doing the right thing for themselves and for the causes they care about. To that end, keep in mind the changes to the charitable contribution deduction for 2021:
- Extends until 2021 the above-the-line temporary charitable deduction that was included in the CARES Act. Non-itemizer individuals in tax year 2021 can deduct $300 for cash contributions to qualifying public charities, and non-itemizer couples filing jointly qualify for $600. Donations to donor advised funds and supporting organizations are not eligible for this deduction; however, we can create designated funds that qualify for the deduction.
- Extends for one year the increased limit from the CARES Act on deductible charitable contributions for corporations and taxpayers who itemize. The limits for 2021 will be 100 percent of AGI for individuals and 25 percent of taxable income for corporations