President Joe Biden’s proposed tax changes could impact high-net-worth individuals and their charitable giving choices. While the proposals include increasing the top rate on taxpayers making more than $400,000 and increasing capital gains and dividend tax rates for taxpayers earning more than $1 million annually, these changes have the potential to spur charitable giving by lowering taxable income and increasing the value and efficiency of charitable donations for these taxpayers. These changes could potentially induce more gifting of highly appreciated assets like shares of stock in lieu of cash.
Outlined below are the highlights of proposed tax reform; however, the bottom line is that there may be short-term incentive to give for those who are philanthropic. We recommend donors considering gifts with major tax implications should wait until closer to the end of the calendar year to see what is passed and what is not.
- 39.6% tax rate on capital gains for taxpayers with an income more than $1 million
- 28% limit of on charitable deductions for taxpayers with an income more than $400,000
- 12.4% Social security payroll tax to income exceeding $400,000
- The above and the proposed additional Social Security tax to income exceeding $400,000, raised from $142,800 of earned income now, “would produce a donut hole between $142,800 and $400,000 where no Social Security tax would be due,” said Robert Karon, Minneapolis-based managing director at CBIZ MHM. “This could encourage people to make donations to get under the $400,000 mark.”
- Reinstating the Pease Limitation on itemized deductions for taxpayer with more than a $400,000 income, which was previously eliminated by 2017 reform. Pease Limitation: caps how much certain taxpayers can claim in terms of itemized deduction
- No effort to limit the value of itemized deductions, including contributions to charity, however the proposal may see significant changes in Congress
- CARES act extended through 2021
-Limit of 100% of adjusted gross income (AGI) for gifts to public charities
-Donations exceeding the AGI limitations carry over for five years (can only be used in a year when a taxpayer itemizes deductions).