Last updated: February 22, 2022
If you’re like most people, you give to charity because you want to make an impact on the world or support a cause you care about. But how much you give is a financial decision. Tax incentives may help you to give more than you could otherwise and provide even more resources to causes you care about.
That’s why it can be valuable to stay on top of potential legislative changes like those proposed by the Biden administration and discussed in Congress—especially as you create a strategic long-term plan for giving this year and in years to come.
Of course, there are still many unknowns with any tax or economic reforms. While we know which proposals the Biden administration is pursuing in the Build Back Better plan, the slim Democratic majorities in Congress mean that enacting major changes may be challenging. If they do move forward, you can expect to see many of these ideas evolving with further debate, modification and negotiation among elected officials, the Treasury Department and the IRS.
Regardless of what the future holds, donors should review their current tax strategy to make sure they take advantage of existing planning opportunities. Consider meeting with your financial advisor or CPA to discuss how charitable giving can take your holistic financial plan to the next level.
The Biden administration and Congress are debating several ideas for tax reform, and others were proposed previously. While the details may change based on the political realities of today, examining these ideas can still help inform your charitable giving this year.
The Build Back Better framework included changes to corporate taxes that may have a downward impact on business owners and investors. Proposals include changes to some international taxes and a new book minimum corporate tax of 15% for companies making at least $1 billion in profit. Additionally, the plan would introduce a 1% excise tax on corporate stock buybacks—though there may be exceptions for stock contributed into retirement accounts or equity-based compensation.
Charitable tax deductions for businesses vary depending on business type, but these changes could make corporate philanthropy more valuable in the years ahead. Additionally, charitable giving can be a powerful strategy to complement vesting equity awards—but equity compensation may be impacted by a new book minimum tax. Business owners and employees with equity compensation should consult with a trusted tax advisor to consider how their financial situation could be affected.
Though not currently included in the Build Back Better plan, the below proposals were previously introduced as part of the Biden administration’s tax reform goals. Staying aware of these potential changes and their impact on tax reform could be a smart move for donors planning their future giving.
The Biden administration proposed an increase in tax rates for high-income earners—namely, those earning more than $400,000 annually. If pursued, the highest income tax rate could return to 39.6% from its current 37%.
Impact on charitable giving:
Higher marginal tax rates could make the benefits of charitable giving more significant by increasing the value of the tax deduction compared to a similar contribution made under current rules. Charitable giving could become an even more important strategy for taxpayers looking to maximize their itemized deductions and lower their overall tax liabilities.
Both the Biden administration and House Democrats have proposed a sharp increase in taxes on long-term capital gains. Taxpayers are subject to capital gains tax when selling appreciated securities held for more than a year. Biden’s plan proposed treating capital gains like ordinary income for taxpayers with an income above $1 million. Along with the current 3.8% tax on net investment income, this change would increase the top capital gains tax rate for those taxpayers from 23.8% to 43.4%. The House Democrats plan would raise the top capital gains tax rate to 25%, making the maximum effective rate 31.8% after the Medicare surcharge and a new 3% surtax for individuals with an AGI over $5 million.
Impact on charitable giving:
When donors contribute long-term appreciated assets to charity, they may minimize capital gains tax owed. Donors are eligible to deduct the full fair market value of the contributed property but are not taxed on that unrealized appreciation. With an increase to the capital gains tax rate, this tax benefit could become even more significant. Donors may continue to be eligible to take a fair market value tax deduction on their contributions.
Biden previously proposed repealing the tax provision that allows a step-up in basis on inherited assets to their full fair market value upon death. Under the current law, any appreciation on a property from the time it was originally acquired until the decedent’s death permanently escapes capital gains tax. His proposal would have also imposed a tax on certain transfers of appreciated property including property transferred at death (with some exceptions). Though it doesn’t appear to be included in the latest version of the Build Back Better plan, earlier versions would have reduced the estate tax exemption from $11.7 million in 2021 to $5.0 million at 2010 levels, adjusted for inflation. Finally, one other provision that was included in the first House bill was a change to the grantor trust rule, which would have pulled assets in a grantor trust back into a taxable estate at death. Though it was eliminated in the latest draft, this provision would have given more incentive for charitable giving if it moved forward.
Changes to the rules related to inherited property make it more important than ever for high-net-worth individuals to actively engage in estate planning in order to reduce potential future tax liabilities.
Estates are entitled to a deduction for charitable donations. Many high-net-worth individuals plan to offset estate taxes with a financial plan that includes charitable giving—both by reducing the size of their estates prior to death and by including charitable beneficiaries in their estate plans.
Depending on the details, beneficiaries who inherit appreciated property may be more incentivized to donate that property to charity. Charitable planning could become more important to these taxpayers, but specific language is needed to understand the potential ramifications. For the many investors who have highly appreciated securities in their portfolios after a long bull market, a charitable donation could represent an even more significant tax savings.
While each proposal is presented here separately, it’s important to consider the full picture of how they could combine. Be sure to seek guidance from a financial advisor or CPA to understand how any rules that become law could affect your individual situation.
As we contemplate the next four years, it is also important to consider what could happen if the Biden administration is unable to navigate their proposals through Congress successfully.
Many of the provisions in the Tax Cuts and Jobs Act of 2017 are temporary and are set to expire after 2025 unless they are extended or repealed. This means that changes to how Americans pay taxes could be coming within the next few years—whether or not Biden’s proposals become law.
For example, the Tax Cuts and Jobs Act doubled the standard deduction—which significantly shrank the pool of taxpayers who itemize their tax deductions each year. If the standard deduction is halved again, many more taxpayers will be in the position to take advantage of the deduction for charitable gifts. As another example, the 2017 law increased the deduction limit on cash contributions from 50% of a taxpayer’s adjusted gross income (AGI) to 60%. Dropping the limit back to 50% of AGI would limit the benefit of some taxpayers’ charitable gifts.
Sunsetting provisions in the Tax Cuts and Jobs Act would have a significant effect on how donors approach giving—but it would be several years before these changes occur, so donors have a long lead time to consider their potential strategy.
Potential tax reforms present both opportunities and challenges related to charitable tax planning strategies. While these proposals remain just that for now, it could be a good time to check in with your financial advisor or CPA to assess your current situation and to understand how your charitable giving could be affected under the proposed rules.
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