Melinda P. Shull, CTFA

Senior Trust Relationship Officer

Proposed Tax Reform and Philanthropy

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 and when you give is typically 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.

With much of the tax reform being talked about, little has been said about the possible impact of some of the tax proposals on philanthropy. Some planning options may be curtailed, yet others will continue to exist, and may even present better tax-saving opportunities if income tax rates increase in future years.

Charitable Planning Techniques that Would Not Change

Of course, there are still many unknowns with any tax or economic reforms. Yet there are some of the existing charitable giving techniques that apparently would not be threatened with the proposed tax law changes.

Gift of Appreciated Assets: The gift of appreciated securities or other assets held long-term are still tax deductible at their fair market value, no matter how low their cost basis. Such lifetime gifts are deductible up to 30% of the donor’s adjusted gross income (AGI)1, with any unused portion of the charitable deduction carried forward for up to 5 subsequent tax years. These lifetime gifts of appreciated assets may become more important if there is a deemed disposition at the owner’s death, where the inherent capital gain would become [along with their IRA] income in respect of a decedent [IRD].

for example: John will have an adjusted gross income (AGI) of $100,000 on his 2021 tax return. John can deduct up to $30,000 of charitable gifts with appreciated stock on his 2021 tax return. John holds Facebook stock (FB) that he purchased in December, 2018 at $125/share. With a current trading price around $375, John could gift 80 shares or approx. $30,000 to a favorite charity. This would be a deduction on John’s tax return and John would not be subject to the capital gains tax on the appreciated stock. The charity would then sell the stock and not pay taxes.

Charitable Step-Up Strategy: If there is to be a deemed disposition on the owner’s death of his or her appreciated assets, the donor might consider gifting the appreciated securities to charities now, and using the cash that would otherwise have been donated to charity on death to repurchase the securities. Those steps would result in a higher income tax cost basis for the securities for capital gains recognition purposes on the owner’s death.

for example: Instead of making a cash donation $300, John gifts 1 share of Facebook stock to the charity with the low cost basis. Then John purchased the 1 share of Facebook back into the account at a current market price. The result is the same, but now John will have a higher cost basis and pay less in capital gains taxes in the future.

Charitable Gifts of Cash: Lost among all the legislative initiatives that are attracting so much publicity is the fact that for 2021 only, immediate gifts of cash to charities qualify as charitable income tax deductions up to 100% of the donor’s AGI. Excluded from this cash-opportunity are cash gifts to private foundations, donor-advised funds, and charitable remainder trusts. This gifting opportunity is best for those individuals who hold a lot of cash, who have a relatively low AGI for 2021, and who hold significant other assets. Thus, a large cash gift to a charity in 2021, up to the donor’s AGI, could completely eliminate any federal income tax liability for the donor for 2021.

for example: Mary gives annually to charities and has an AGI of $100,000. For 2021 only, Mary is able to make a charitable contribution of $100,000 cash to eliminate any taxes due. Mary will only benefit from this strategy if Mary can itemize. Keep in mind it must be cash gifts – gifts of appreciated stock do not qualify and gifts to private foundations or donor advised funds do not qualify.

Qualified Charitable Distributions: The opportunity of those individuals 70½ or older to give up to $100,000 from their traditional IRA as a qualified charitable distribution (QCD) still exists. Not receiving taxable income as a required minimum distribution (RMD) is the same thing as receiving the income and then gifting the income to charity. Restated, the QCD is the equivalent to an above-the-line charitable income tax deduction that is not reported as part of the donor’s AGI. Using a QCD also keeps the donor’s AGI lower which can impact the donor’s ability to claim other tax deductions that are tied to the donor’s AGI.

for example: Jane turned 70½ on September 12, 2021 and is now eligible to make qualified charitable distributions from an IRA. Jane is not yet 72 and subject to IRA required minimum distributions. However, Jane can gift to charity directly from the IRA account and be able to report the amount as non-taxable income on the Form 1040. It is important to note that the payment should be made directly to the charity from the IRA and not a personal checking account.

Split-Interest Charitable Gifts: Split-interest gifts to charity for life, or for other periods of time, using cash or assets that have not appreciated in value, or when appreciation falls within current exemption amounts, is still a viable planning tax strategy. Currently there are no proposals outstanding that would diminish the longstanding value of a split-interest gift to charity. President Biden’s 2022 budget proposal would not tax gains on gifts of appreciated assets to fund a charitable remainder trust (CRT) by the donor, if the gift to the CRT by the donor is completed before the end of 2021.

for example: Acting now to fund split-interest charitable trusts (CRTs) would avoid the deemed disposition rule on funding the CRT, and it would also remove the value of the transferred assets from the donor’s taxable estate should applicable exemption amounts drop, or federal estate tax rates increase. It’s something to think about for individuals who are charitably inclined.

Testamentary Gifts to Charity: The unlimited federal estate tax charitable deduction still exists. This charitable estate tax deduction could become important (again) if an individual’s applicable exemption amount drops from the current $11.7 million to a lower amount, like $5.0 million, or possibly even lower, such as the $3.5 million exemption Bernie Sanders has proposed.

for example: Charitable bequests in wills and trusts still have validity  even if the applicable exemption amount is reduced in future years, there is the probable increase in federal income tax rates.

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 client centric team and CPA to discuss how charitable giving can take your holistic financial plan to the next level.

1Adjusted Gross Income (AGI) is defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account. Your AGI will never be more than your Gross Total Income on you return and, in some cases, may be lower. (IRS Definition of Adjusted Gross Income)