President Biden’s tax proposals might affect long-term charitable giving for the wealthy, possibly leading to an increase in giving.
“First, he wants to raise the top tax rate to 39.6%, a benefit for donations and a bigger tax savings," said Robert Karon, Minneapolis-based managing director at CBIZ MHM. Second, he would increase the tax rate on long-term capital gains and dividends to 39.6 percent on income over $1 million. This would make some special gift vehicles like charitable remainder trusts and gift annuities more appealing,” he said, noting that these two changes can reduce or eliminate capital gains when used for charitable purposes. Biden also wants to cap itemized tax deductions for the wealthy, including for charitable donations.
To adopt to the changes, Karon has used private family foundations and charitable lead trusts, for example, for high-net-worth clients to make charitable contributions. The former have tighter donation limits than some donating tools. The latter use a formula of time, fair market value and compounding return to calculate growth for the beneficiaries while providing a regular and recurring donation to a charity, he said.
Among other tools, a donation of appreciated stock still generally makes sense for wealthy taxpayers, added Kathleen Buchs, a CPA and director at MAI Capital Management in Cleveland. The donor gets the double benefit of a charitable deduction for the value of the stock and avoids gain recognition on the appreciation in value. That combination is especially good with today’s increased stock valuations, she said.
"Take an individual who donates $100,000 of publicly held stock held for more than 12 months with a zero-cost tax basis,” Karon said. “If that individual sold this stock, their tax cost would be 23.8% federal, or $23,800. You can deduct up to 30% of your AGI with appreciated stock. You get a 100% tax deduction for the fair market value of that stock and pay no tax on the appreciation.” Some high-tax rate states offer more tax savings on big donations, he said.
Mary Kay Foss, a CPA in Walnut Creek, Calif., likes qualified charitable distributions (QCDs) and donor-advised funds (DAFs). With the QCD, “gifts of up to $100,000 are made by someone over 70½ directly from their IRA. The qualifying gift erases the tax on an IRA withdrawal,” she said.
The DAF can be established with many brokerage firms or a local community fund. “The taxpayer gets the tax deduction in the year the value goes into the fund, but charities receive their dollars when [the money is] distributed out of the fund,” Foss said. “This works well if you have a large liquidity event that increases income one year. This is also great for taxpayers who bunch deductions to take advantage of the enhanced standard deduction from 2018 to 2025.”
The DAF can make gifts similar to those of a private foundation without the recordkeeping, tax returns, publicity and excise taxes, Foss added.
Looming changes that might curtail tax benefits for the wealthy may inspire those clients to give more, said Clay Stevens, director in strategic planning at wealth management firm Aspiriant. “The increase in the estate tax exemption, which doubled in 2017, caused many who otherwise might gift to charity at death to avoid such tax to instead gift more to their family and less to charity,” he said. Trimming this exception, as Biden plans, could redirect estate gifts to charities.
Try to support organizations that have lower fundraising cost percentages. “Some charities aren’t even recognized by the IRS as qualified 501c3 tax-exempt organizations,” said Andrew Crowell, vice chairman of wealth management at D.A. Davidson.
“Verifying that the philanthropic organization is paramount. Some donors rush their giving ... and fail to conduct due diligence,” he said. “These same donors wouldn’t make investment decisions in their portfolios without thoughtful research.”