How will proposed changes in federal tax laws affect charitable giving?

In light of the need to generate revenues with which to pay for the proposed significant investments in physical and human infrastructure and other legislative initiatives proposed by the Biden administration, it is likely that Congress will enact federal tax law changes before year-end, some of which will affect individuals.  Those who regularly make charitable donations or who plan on additional charitable giving this year, and in the near future, should be aware of how these possible federal tax law changes could affect their charitable giving strategy.  The changes that affect income taxes likely will not become effective until January 1, 2022. 

 Proposed Change #1: Increases in Income Tax Rates and Capital Gains Tax Rates 

 For high-income individuals, those with taxable income in excess of $400,000, federal income tax rates may increase.  For example, the highest income tax rate could increase from 37% to 39.6%.  In addition, the preferential tax rate for capital gains (currently 23.8% including a 3.8% tax on net investment income) will not be available to individuals with capital gains in excess of $1 million (resulting in a top capital gains tax rate of 43.4%, which is 39.6% plus 3.8%).  Those who might be affected by these changes and who itemize their deductions should consider deferring charitable gifts until 2022 and making gifts of highly appreciated stocks and bonds to charities rather than gifts of cash. 

 Proposed Change #2: Cap on Tax Benefit of Itemized Deductions 

 Charitable deductions are generally available only to taxpayers who can itemize their deductions. If the proposed tax law changes are enacted, the tax benefit of itemized deductions would be limited to 28%.  This change would reduce the benefit of charitable deductions to individuals with income taxed above this rate.  (For 2021, taxable income of married taxpayers in excess of $329,850 is subject to income taxation at 32%.) 

 Proposed Change #3: Reduction in Estate Tax Exemptions and Repeal of Step-Up in Basis 

 For individuals whose taxable estates will exceed $3.5 million at death, the current $11.7 million federal estate tax exemption amount may be significantly reduced to as low as $3.5 million.  In addition, under current law, the cost basis for income tax purposes of appreciated assets owned by a decedent is increased (stepped up) to the fair market value of the assets as of date of death.  This step-up in basis at death may be eliminated and the appreciation in assets as of date of death may be subject to capital gains tax as if the assets were sold by the decedent immediately after death.  This "deemed sale" will not apply to appreciated assets that are donated to charities.  These two changes could apply to those who die after the new law is signed into law (even those who die in 2021 after the date of enactment).  

 High net worth individuals who want to make donations to charities at their death should consider using highly appreciated assets to fund their testamentary charitable donations rather than cash and perhaps in lieu of designating charities as beneficiaries of retirement plan proceeds.  In addition, those who inherit stocks, bonds and other assets that have a low cost basis may want to consider donating these assets to charities to avoid incurring significant capital gains taxes on sale of the inherited assets. 

 For questions about the Professional Advisory Council or the upcoming estate and financial planning education seminars, please contact Shannon Small at shannon@jewishnashville.org. 

Ralph Levy is a senior partner in the Healthcare practice at Dickinson Wright. He assists and  advises entrepreneurs and owners of closely-held businesses in operationalizing their business  plans, including the estate planning, business succession and tax planning issues thereof. Ralph has over 30 years of experience in counseling clients in the Healthcare arena. He has served as General Counsel for a national health care services provider and manufacturer of medical equipment where he gained critical operating experience and an appreciation of the need for businesses to manage their legal matters in an efficient but proactive manner. He leverages this valuable knowledge by assisting clients in establishing, operating and expanding their businesses.