Supporting Your Mission as a New Year Approaches
In the wake of 2020’s many obstacles, your mission has never been more important. At the same time, your organization is experiencing one of the most challenging fundraising environments in decades.
The community foundation is by your side. Our mission is to keep the power of philanthropy strong in our community so that your organization can thrive and continue to serve the people who count on you.
Here are two ways the community foundation can help ease the pressure as 2020 draws to a close.
We can assist you as you help your donors plan for year-end giving.
Encouraging your donors to make charitable donations during the holiday season has traditionally been made easier by the looming December 31 tax deadline. This year, encouragement is a bit tricker because so many elements of tax law seem up in the air.
The elections may very well have left your high-net worth donors with a dilemma as they consider whether to make large gifts to your organization: Should your donors assume that laws will change such that charitable gifts will be even more tax efficient in 2021 and beyond? Or should your donors bet on the tax laws becoming less favorable to charitable giving in the future? Either scenario could play out, depending on the extent and nature of tax reform.
Here’s what’s in play:
Under Joe Biden’s proposed tax plan, taxpayers making more than $400,000 per year would be taxed at a top income tax rate of 39.6%, an increase from 37% under current law. For some of your donors, this would mean gifts to your organization would become even more tax efficient under the new law.
However, a separate provision in Biden’s proposed plan would impose a 28% limit on charitable deductions for taxpayers who make more than $400,000 per year. This would mean that instead of avoiding income tax on charitable gifts at the rate of 39.6% as described above, these taxpayers would escape income tax only at a rate of 28%. (A similar provision was proposed, but never enacted, during the Obama Administration.)
Biden’s tax proposal also calls for increasing--from a maximum rate of 20% to 39.6%--the capital gains and dividend tax rates for taxpayers whose annual earnings exceed $1 million. For affected taxpayers, this change would create opportunities to avoid significantly more tax than is possible under current law for gifts of appreciated assets. An increase like this would create a huge incentive for donors to give to your organization.
Biden’s proposal calls for a 3% reduction of itemized deductions for taxpayers making more than $400,000 per year. This is reminiscent of the so-called “Pease Amendment” that was repealed in 2018. Although the reinstatement of this rule could potentially discourage your donors from making gifts, the rule’s impact would be blunted for donors for whom the reduction is absorbed by other types of itemized deductions (mortgage interest payments, for instance).
Your ultra-wealthy philanthropists are surely keeping an eye on Biden’s stated intention to raise estate taxes and change the way capital assets are taxed after death. Currently, the gift and estate tax exemption per person is $11.58 million and $23.16 million for a married couple. These amounts are effectively double what they were before the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA calls for an automatic sunset of these increases on December 31, 2025, at which point the exemption will drop back down to $5 million per person, as adjusted for inflation. Under Biden’s proposed tax plan, though, the estate and gift tax exemption and rates would be restored to the lower levels of more than a decade ago. This would create a major incentive for the ultra affluent to give even more of their wealth to support your mission.
Finally, Biden’s proposal calls for substantial elimination of the step up in basis from the taxpayer’s cost to fair market value at the time of death, further incentivizing testamentary gifts by donors to your organization.
As the saying goes, there are a lot of moving parts! The team at the community foundation is always happy to discuss scenarios, share insights about what might happen under tax reform, and assist you as you help your donors fulfill their desire to support your important mission.
We can serve as an extension of your team to answer questions as they pop up.
With this year’s job losses in the nonprofit sector topping 900,000 since February, we know your teams are short staffed. This can make even small projects, such as researching and responding to donors’ inquiries, seem monumental.
Consider the team at the community foundation to be on call. We’ve got answers to your year-end giving questions. We don’t want you to miss out on the few perks that 2020 has to offer your donors as they support your good work, including:
A reduction in adjusted gross income (even for donors who take the standard deduction) for charitable contributions up to $300 per taxpayer.
An increase in allowable itemized deductions for charitable donations up to 100% of a donor’s 2020 adjusted gross income, instead the usual 60% cap.
The waiver of the Required Minimum Distribution for 2020, which may free up cash for your donors to increase their charitable gifts to your organization.
The favorable rules that are still in effect for Qualified Charitable Distributions, which permit both itemizers and non-itemizers to direct up to $100,000 from an IRA to qualifying charities without triggering a taxable event.
Your team at the community foundation is always happy to help. We look forward to hearing from you and wish you all the best for the season.
This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.