Charitable Giving Just Got More Affordable!

Charitable Giving Just Got More Affordable!

Article posted in Income Tax on 11 February 2013| 1 comments
audience: National Publication | last updated: 20 February 2013
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Summary

Everybody wants to know how the changes in the 2013 tax laws will affect them. The reality is that most Americans won’t notice much of a change but rates will go up for more affluent Americans. In this article, charitable and wealth transfer consultant Dave Holaday reminds us the silver lining for affluent Americans who are charitably minded is that higher income tax rates make it less expensive to make charitable gifts, especially gifts of appreciated property.

By David W. Holaday, ChFC, CAP®

Everybody wants to know how the changes in the 2013 tax laws will affect them.  The reality is that most Americans won’t notice much of a change but rates will go up for more affluent Americans.  The silver lining for affluent Americans who are charitably minded is that higher income tax rates make it less expensive to make charitable gifts, especially gifts of appreciated property.

In 2013, the top income tax rate increased from 35% to 39.6% for married couples making over $400,000 per year. The top capital gain tax rate increased from 15% to 20%.  But when you add the 3.8% Medicare Surtax applicable to certain capital gain income, the top tax rate on capital gains is 23.8%.

The table below provides a simple conceptual comparison of the income tax benefits created by a gift of $100,000 of appreciated securities under 2012 and 2013 laws by a married couple filing jointly and at the top tax rates.  We assumed a charitable gift of publicly traded securities valued at $100,000 with a cost basis of $20,000. 

In 2012, such a charitable gift would have generated income tax savings of $100,000 x 35% = $35,000.  For simplicity, we assumed that donor could use the entire charitable deduction in one year.  In addition to the tax benefit of the charitable deduction, the gift of low cost basis assets enables the donor to permanently avoid $80,000 in capital gains.  This would produce additional tax savings of $80,000 x 15% = $12,000.  Thus, the total tax benefit of the charitable gift in 2012 would have been $47,000 resulting in a net cost of $53,000.

2012 Law

2013 Law

Top ordinary income tax rate

35%

39.60%

Top Long-term capital gain tax rate (2013 includes 3.8% Surtax)

15%

23.80%

Fair market value of publicly traded securities

$100,000

$100,000

Cost basis of publicly traded securities

20,000

20,000

Charitable contribution tax deduction

100,000

100,000

Income tax savings from charitable income tax deduction at a 35% marginal tax bracket

35,000

39,600

Long-term capital gain avoided

80,000

80,000

Income tax savings from permanently avoiding LTCG

12,000

19,040

Total tax advantages from deduction and avoidance of gain

47,000

58,640

Net cost of gift

53,000

41,360

In 2013, the same charitable gift would have generated a charitable income tax deduction of $100,000. It is true that itemized deductions must now be reduced by 3% times the amount by which the adjusted gross income exceeds the “threshold” ($300,000 for married taxpayers filing jointly).  If the donors have an AGI of $500,000, their income will exceed the threshold by $200,000 so their itemized deductions will be reduced by $200,000 x 3% = $6,000.  But if the total of their interest, taxes, other charitable contributions and other Schedule A deductions exceeds $6,000, which is the case for most taxpayers earning this much, an additional gift of $100,000 should be fully deductible.  Therefore, the income tax savings would be $100,000 x 39.6% = $39,600.  In addition, the gift of low cost basis assets enables the donor to permanently avoid $80,000 in capital gains which should produce additional tax savings of $80,000 x 23.8% = $19,040.  Thus, the total tax benefit of the charitable gift would be $58,640 resulting in a net cost of $41,360.

This represents about a 22% reduction in the cost of giving.  Looking at it another way, these donors could now give $125,000 of highly appreciated assets for approximately the same net cost of a $100,000 gift in 2012.  Charities in your area need support from the professional advisor community in helping donors to understand how the new lower cost of charitable giving can enable them to be more generous!


About David W. Holaday, ChFC, CAP®

For more than 25 years David Holaday has provided consulting services in the areas of tax, charitable & wealth transfer planning. He has served individuals, independent estate planning professionals, financial institutions, & charitable organizations. With a national reputation for developing unique and comprehensive solutions for complex family situations, Dave collaborates with the client's existing tax, legal, insurance & investment advisors. Prior to founding Wealth Design Consultants, he co-founded and later sold The Wealth Design Center (a technology, training and consulting firm). Mr. Holaday can be reached at dholaday@wdcplan.com or call (317) 571-3616.

Copyright © 2012 Wealth Design Consultants, LLC. Used by permission.

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Re: Charitable Giving Just Got More Affordable!

Charities must focus on mission.

Yes, a 2013 contribution provides greater income tax savings than last year; however, the donor in your example will have 80% of his income taxed at a higher rate than 2012. Even before considering the 2% increase in the payroll tax, the person in your example will have $18,400 less in his pocket. Will he be of a mind to increase his charitable giving?

By my memory, charitable giving correlates most closely with disposable income, not tax rates or stock market values, highlighting my first sentence.

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