Charitable Donors Avoid Draconian Parts of Biden Tax Plan (So Far)

The tagging of the budget reconciliation bill by the House Ways and Means Committee in mid-September left out some of the more punitive tax proposals launched by the Biden administration earlier this year. Of course, the Senate has yet to weigh in its own language, so there is a lot of uncertainty as to what will be part of the final congressional bill.

In the meantime, here’s what you need to know about the proposals when it comes to charitable donors.

Changes to the charitable donation deduction could be dropped

When campaigning for the presidency, one of the most unfortunate changes Joe Biden proposed to the tax code was the potential limit on the current tax deduction for itemized deductions, which would include charitable donations. Instead of keeping it at 37% for high earners, candidate Biden has proposed reducing the benefit of the tax deduction to 28% for those in the highest tax brackets (as well as for most other itemized deductions).

So for every $ 100,000 that a high-income taxpayer gives, he would have received $ 28,000 in tax savings instead of the $ 37,000 he would receive under the current law if he were to was in the 37% range. This would have been a significant departure from the current law.

While it is true that not all charitable giving is directly linked to federal tax deductions, the fact remains that the current administration can flirt with “unintended consequences” – which worries many economists – and the negative effect. that this flirtation could have on one of America’s greatest asset: its robust and active charitable sector.

The good news is that this proposal was not incorporated into Biden’s updated budget plan, released by the Treasury Department on May 28, known as the Green Paper. And the House Ways and Means Committee’s markup also did not include this proposed change, but it remains on the table, and the Senate Finance Committee has yet to reveal what it thinks of this. change. It is therefore necessary to be aware of this possible threat to charitable donations.

So what could happen next?

Aside from charitable giving, there are a number of important changes proposed in the various tax plans that are currently floating on Capitol Hill. It’s unclear what the final budget bill will end up including, but it’s worth thinking about how to prepare for the possibilities – whether it’s higher tax rates for higher incomes. , an increase in capital gains tax rates or changes to our inheritance tax. system.

While the details of these tax proposals may seem overwhelming, there are some options to mitigate one’s own tax liability under some of these proposed tax hikes. Not surprisingly, as is often the case, there are a number of exclusions that may apply to your particular situation.

Accelerate the harvest of earnings – Maybe

It may be too late to “reap” any capital gains this year to avoid a possible rate hike, as any capital gains tax increases that may pass are supposed to apply retroactively. to tax year 2021. Currently, long-term capital gains and eligible dividends are taxed at 20% for taxable income greater than $ 1 million. Under the Biden Plan, however, taxable income of over $ 1 million generated from capital gains and eligible dividends would be taxed at the rate of 39.6%. The House Ways and Means Committee plan, meanwhile, caps the maximum rate at 25%.

Whatever you decide to do to prepare for changes in capital gains tax rates, closely monitor and manage your capital gains and plan to realize your income accordingly. Additionally, if you, in consultation with your tax advisors, determine that you should earn income from growing your investments this year, consider lowering your income tax by increasing the amount you donate to charity.

For example, perhaps you could make an increased contribution to a donor advised fund, taking advantage of current tax deductibility rules while setting aside a charitable fund to fund organizations in subsequent years.

Use it or lose it

This is probably the year to transfer large sums of money from your estate to trusts established for your loved ones. Throughout 2021, taxpayers can cumulatively transfer up to $ 11.7 million without inheritance and gift taxes to financial vehicles such as charitable residual trusts.

Under a plan launched by Senator Bernie Sanders, that number would drop dramatically – from $ 11.7 million to $ 3.5 million for wealth transfers on the death of a benefactor. As a candidate, Biden campaigned on a similar platform, however, which was not explicitly included in his US family plan, which was recently released as the Green Paper.

The House, meanwhile, reduced some of this proposed reduction in the inheritance and gift tax exemption, preferring to reduce the current exemption by $ 11.7 million adjusted for inflation. at $ 5 million, indexed to inflation, effective January 1, 2022. Obviously, however, in either case, dividing your wealth up front with loved ones would seem like a smart way to reduce taxes payable from your estate upon your death.

Carry over your income

Assuming the new tax proposals are passed, the creative minds of the financial services industry will likely identify new products and adapt existing products to help clients defer income to avoid more punitive tax increases and to preserve more funds for posterity. I am convinced, for example, that there will be more information to come from tax advisers near and far on charitable remainder trusts.

It’s time for conversion – maybe

Also consider converting a qualified retirement account to a Roth IRA. While the conversion often triggers an income event, it could be the perfect way to avoid the highest marginal tax rate hikes. Additionally, the provision in the CARES 2020 law to deduct 100% of its adjusted gross income for cash contributions to charity (with certain exclusions) has been carried over to tax year 2021.

Therefore, a person who converts a qualified retirement account into a Roth IRA has the option of protecting some of that income from tax if the taxpayer donates up to 100% of his adjusted gross income.

Finally, remember that this post is for educational purposes only and does not take into account your personal and, therefore, unique situation. As such, each taxpayer should consult their tax advisers before determining an action plan to mitigate the effects of future changes in federal tax policy.