As we head into December, a traditionally strong month for philanthropy, many are wondering how the possibility of increased tax rates related to the "fiscal cliff" will impact charitable giving among the wealthy.
Charitable giving has always been a way for the wealthy to reduce their tax burden. Unless Congress acts, the President George W. Bush-era tax cuts will expire on Dec. 31. If that happens and there is no new tax reform by the end of the year, the top individual income tax rate will rise from 35 percent to 39.6 percent. Long-term capital gains tax rates will also rise, from 15 percent to 20 percent for most people. The estate tax exemption will revert to $1 million and any amounts above that will be taxed at 55 percent. In addition to those changes, the wealthy will be charged a surtax of 3.8 percent to pay for health care reform.
"I've seen clients do some front-loading into charities this year," ahead of the possibility of higher rates next year, says Susan Colpitts, CFO of Signature, a wealth management firm in Virginia.
Colpitts says there are three possible outcomes regarding the fiscal cliff that will impact philanthropy:
- Nothing will change. If Congress enacts a one-year extension of the Bush-era tax cuts, the tax consequences of charitable giving in 2013 will be the same as they are this year.
- Tax rates will increase. In that case, Colpitts says, charitable contributions will be worth more to the wealthy in 2013 because the tax deduction will have a higher value.
- Charitable deductions will be limited or eliminated. That means charitable bequests will have a smaller tax benefit for the wealthy.
So does any of this indicate how the wealthy will react if tax laws change next year? Not really, Colpitts says. Taxes are not the only driver when it comes to decisions around charitable giving. There are lots of factors that go into philanthropy -- one of the most powerful being the donor's passion and sense of obligation to give back.
In the past few years, the performance of the stock market has also played a part in the decision to give, Colpitts adds. "A lot of people have had appreciation in their securities, which we encourage them to use" for charitable giving, she says. Those who are accelerating recognition of capital gains this year while the rates are still low have been offsetting the increase in income with charitable gifts.
Those who might decide to give less next year are wealthy wage-earners who spend more of their cash flow and would feel the restriction in income if taxes claim a larger share. But the largest donors have sufficient assets and discretionary income to withstand the tax bite. "I think most of my clients would keep giving at the same level," says Colpitts. "They believe this is an important component of what makes our country work."
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