tax on charitable giving

Still wondering what’s the best year-end giving advice?

At this point – with only 3 business days left in the year and the country headed towards what I coined “Tax Doomsday” in March this year (when very few others were concerned) – there is not much left to say.

On donors advancing their gifting, clearly donor advised fund (DAF) programs benefited from all of the talk about capping deductions.  My friend Bryan Clontz at the Dechomai Foundation (a DAF dedicated to accepting non-cash/unusual assets) reported that they tripled their best year with over $75 million in DAF contributions this year.  Fidelity and Schwab DAFs already reported their stellar years to the Wall Street Journal.

So, if you are one of the few working – as I am (not sure how planned giving fundraisers can justify taking off at this time of the year) – and you have donors talking to you about these issues, here is what I think the advice is:

For those considering $1 million or greater sized gifts (or anywhere near that level) in 2013 and beyond, you may want to advance those gifts in any way you can.  The top tax bracket donor will easily lose over $40,000 in deduction rebates (actual cash loss) if they tamper with deduction caps.  In a worst case (for the donor) scenario, a donor loses over $100,000 in deductions on such sized gifts (if a 28% cap on deduction is passed).  See what I have written about over the past few weeks: capping deductions still is an attractive option to Congress if they actually hammer out a new tax deal.

For everyone else, donors should feel free to gift this year (and get the tax benefits now) and/or plan on gifting next year (when it may or may not be worth more).  There is no way to guarantee what will be with the Fiscal Cliff – that is why those wavering on their year-end gifts should go ahead and at least receive the benefits they know are available.

For all of the build up on these issues, I feel a bit of a let down. There is nothing exciting to report – just encourage your donors to stay the course and see what happens in 2013.  Once 2013 kicks in though, and all of the doomsday tax scenarios become a reality, I am sure I will be back with more exciting posts!  And, reasons why fundraisers need to get their planned giving houses in order!

President Obama Proposes to Tax Charitable Giving by the Wealthy?

As part of the President’s FY 2012 budget proposals, the Administration is proposing to decrease the value of charitable deductions and all other itemized deductions for individuals earning over $200,000 and couples earning over $250,000.

For these higher earners, this proposal caps off deductibility at 28% for charitable gifts and all other itemized deductions including mortgage interest and state/local taxes. In other words, these individuals, likely in the highest federal income tax bracket of 39.6% (also proposed), would only be able to receive tax credit for 28% of the value of their itemized deductions.

A real dollar example:  A donor who makes a fully deductible charitable gift of $100,000 who is in the top federal tax bracket of 35% (current highest bracket) under today’s law would reduce his/her taxable income by $100,000 and thereby save $35,000 in taxes.  This some donor, under the proposed law, would only be able to apply any tax saving for this charitable gift as if he/she were in the 28% bracket, thus only saving $28,000 for the same $100,000 gift.  Coupled with the proposed increase in the top tax income tax bracket to 39.6%, the increased cost of this gift to the donor would be $11,600 more under the proposed law.

Donor in Highest Tax Bracket

Current Law Proposed Law
Charitable Gift

$100,000

$100,000

Tax on $100,000 of Income

$35,000

$39,600

Tax Savings from Gift

$35,000

$28,000

Additional Tax Cost with Proposed Law for Donor in Highest Proposed Bracket    

$11,600

A more simple approach:  President Obama is proposing a $11,600 penalty tax on every $100,000 of charitable gifts made by the wealthy.

While this proposal is startling, there is a bright side to this story:  this is the third year in a row that the President’s budget included such a proposal.  Congress rejected it the first two times.  What is the chance that a now-Republican controlled Congress will even give this one a second thought?