We can only imagine how anxious your clients must be to gain clarity about tax reform so that they can implement planning strategies, take care of the charitable organizations they care about, and move on to enjoying the holidays with friends and family.
That's why this issue of our newsletter drills down into three areas we know are top of mind for you and your charitable clients:
1. Tax reform: What's the latest, and how could it impact charitable giving techniques?
2. Strategies of the wealthy: How much--and how--are billionaires deploying their wealth to help nonprofits?
3. Year-end giving: Remind me again what I should be telling my clients?
As always, please contact us directly if we can be of assistance as you serve your philanthropic clients. We are thankful for you!
--Your friends at the community foundation
Relax a little (maybe?): What’s off the table, what’s still in play, and what your charitable clients need to know now about tax reform
Late last month, the White House released a proposed $1.75 trillion revenue package, putting to rest (at least for now) some of the uncertainty as to how sweeping tax reform could upend wealth planning strategies via changes to top marginal rates, a restructuring of the capital gains tax, and lower estate and gift tax exclusions, all of which have been heavily discussed and debated over the last several weeks. For now, those particular big changes appear to have been dropped.
Attorneys, accountants, and financial advisors who represent high-net worth clients are, however, keenly aware of how the just-proposed legislation still could pack a punch:
Where charitable giving is concerned, the proposed new surtax (modified from earlier versions) is not something that can be avoided or reduced through charitable deductions. That is because the proposed 5% surtax on taxpayers with more than $10 million in adjusted gross income is assessed on just that--adjusted gross income. Below-the-line deductions won’t help. Furthermore, an additional 3% surtax has been proposed for taxpayers with more than $25 million in AGI.
In addition, under this new proposal, pass-through entities, such as S corporations and partnerships, are still the subject of a 3.8% Net Investment Income Tax, as was the case under the prior version of the revenue package. Under the new proposal, this tax would be expanded to taxpayers with taxable income of $400,000 ($500,000 for joint filers) or more.
Of interest to advisors who represent businesses and business owners, under the proposed new law, a 15% “corporate minimum tax” would apply to “book income” of corporations earning profits greater than $1 billion. For your clients who’ve historically relied on income tax credits, this is an important provision to watch because income tax credits would not be as valuable as they are now.
Related, look out for a parallel increase to the global minimum tax rate, especially for corporate clients who have an eye on relocating headquarters to foreign countries. And under the new proposed laws, when a corporation buys back its own stock, it would be taxed like corporate dividends--plus a new 1% excise tax.
Finally, effective as of September 13, 2021 if the legislation is passed as written, high net-worth clients could be significantly impacted by the proposed limitation on “stock exclusions” under Internal Revenue Code Section 1202. For taxpayers with adjusted gross income of $400,000 or more, and for estates and trusts, only the 50% exclusion provision would remain. The 75% and the 100% exclusion would no longer be available.
The buzzword is “billionaire”: How tax reform discussions have pulled complex charitable planning strategies into the spotlight
Forbes reports that the latest headcount of American billionaires checks in at 724. That number surprises some people, and for different reasons. Many are surprised to learn that the number is so low, when the word “billionaire” has been used so frequently lately in discussions about changes to the tax laws. Others are amazed at the vast wealth created by not just dozens, but hundreds, of individuals.
Both reactions have sparked interest in how billionaires and other ultra high-net worth people structure their estate plans and support their favorite charities. Even if your client base doesn’t include one of the 724 American billionaires, it is still well worth your time to spend a few minutes getting familiar with this topic so you can carry on a conversation with curious clients.
Here’s how to get up to speed:
Forbes compiles a list of the 25 most philanthropic billionaires. Scan it so that you’re generally aware of how this group conducts its charitable giving activities.
Know the basics of grantor retained annuity trusts and charitable lead trusts, especially because both vehicles have been the subject of conversation in the ongoing tax reform dialogue.
Understand the core mechanics of ultra high-net worth wealth transfer strategies. You might be surprised that what you learn helps you structure your own clients’ estate plans.
Internalize the old saying “No one gives away a dollar to save 50 cents.” In other words, no matter how aggressive the planning strategy and the resulting tax savings, your clients almost certainly would have more money for themselves and their families if they didn’t give money to charities.
It flows naturally from item 4 that your clients probably don’t take their charitable giving lightly. Clients intend for their charitable dollars to make a difference in the causes they care about. The community foundation has its finger on the pulse of the needs in our region and which organizations are helping and how. Put us on speed dial!
Year-end giving: Repeat, repeat, repeat
It's the season for email newsletters hitting your inbox with tips for tax planning. We get it! With so much information flying around for your clients, too, we highly recommend that you cut through the noise and mention four key tax strategies to your clients at least twice, and ideally three times, before late December:
Don’t let clients miss out on the few provisions of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act that carried over to 2021, including the ability to deduct up to 100% of adjusted gross income (AGI) for cash gifts made directly to qualifying charities and the “universal” charitable deduction of $300 per taxpayer ($600 for a married couple).
Unlike in 2020, when pandemic relief laws offered a tax break, this year your clients have to take required minimum distributions from their qualified retirement accounts. Especially for clients who take the standard deduction, you ought to consider a qualified charitable distribution, which allows eligible individuals to donate up to $100,000 directly from individual retirement accounts to a qualified charity. The community foundation is happy to help your client identify a qualified charity or structure a qualifying fund to receive a distribution.
“Bundling” or “bunching” multiple gifts into tax year 2021 can help your clients who have had exceptionally high incomes this year. Donor-advised funds at the community foundation are particularly useful in these situations. We’d love to discuss this option!
We know you strive to identify the optimal tax strategies for each client’s charitable giving. As always, please contact us to find out how we can make year-end tax savings as frictionless as possible for you and your charitable clients.