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The New Tax Act's Impact on Charitable Giving
The American Taxpayer Relief Act of 2012, enacted by Congress in January 2013, preserves existing tax rates for most Americans, while introducing higher rates for those with the largest incomes. The Act also includes important tax advantages for those who make charitable gifts from retirement plans. Remember Stanford spoke with tax and estate planning attorney John Hopkins, '54, JD '57, recently retired from San Jose's Hopkins & Carley, to learn just how the new Act will affect charitable giving.
Q: The Act includes incentives for lifetime charitable gifts for individuals who are over the age of 70 ½ and are taking required minimum distributions from their Individual Retirement Accounts (IRAs). The law allows the individual to make gifts directly from his or her IRA to charity. How does that work?
A: Known as an "IRA charitable rollover," this is an excellent way to make a gift to charity. The act allows Americans who are 70 ½ or older and are taking their required minimum distributions from their IRA--all of which is taxable income to them--to instead transfer up to $100,000 from an IRA directly to a charity, such as Stanford, tax-free. The distribution will not be included in their adjusted gross income, and that can result in significant tax savings. In many cases this will enable the taxpayer to avoid higher tax brackets and the possible reduction of itemized deductions in those brackets. This option expires on Dec. 31, 2013, but Congress could act to extend this provision for future years.
Q: The Act increased capital gains tax rates for individuals with higher incomes. How might that impact charitable giving?
A: Higher capital gains tax rates create a greater incentive to use appreciated assets to make charitable gifts. If you have an asset that is highly appreciated, such as stock, and you sell the asset, typically you must pay capital gains tax on the amount of appreciation. If you give the appreciated asset to a charity, generally you are entitled to a charitable income tax deduction for the full market value and, when the charity sells the asset, it will not owe capital gains tax. The charity can then use the full proceeds for the purpose you designate. People who are interested in making a gift to charity and also receiving an income should consider using appreciated assets to establish a charitable gift annuity or charitable remainder trust. The donor receives the benefit of a tax deduction for part of the value of his or her gift as well as an income based on the full value of the assets.
Q: The Act had provisions about the estate tax exemption. What do these mean for charities?
A: The estate tax exemption of $5 million for an individual that was in effect for 2011 and 2012, indexed for inflation, has been adopted and will continue to be indexed for inflation. For 2013, the individual exemption is $5.25 million and a couple, with proper planning, can transfer $10.5 million free of estate tax. With more certainty about estate taxes, people are better informed to be able to think about their estate plans and the amounts they want to leave to loved ones and friends, as well as a legacy they might want to provide for charities that are important to them.
Q: There are some new limitations on itemized deductions. How could those limitations, and the higher income tax rates, affect giving?
A: The Act revived the "Pease limitation," which reduces the amount of itemized deductions that certain taxpayers are allowed. Despite some press that the limitations might negatively impact charitable giving, that is not likely, because taxpayers who would be subject to this rule will almost always find that their charitable contribution deductions are not affected. Most Americans have other itemized deductions—such as state income tax, home mortgage interest, or property tax—that will absorb the itemized deduction limitations, and the taxpayer can still take the charitable deduction in full. In fact, the higher income tax rates for the top brackets mean that the charitable deduction is even more valuable now, because those dollars would be taxed at a higher rate if they didn't go to charity. The most negative impact of the Pease limitation is that it has confused many people—those who are not steeped in the tax code. That's why it's a good idea to talk to your tax advisor.
Q: Do you think the Act will have a positive effect overall on charitable giving?
A: Many of the changes to estate and income tax rates will bring more certainty for planning, which will allow people to create thoughtful estate plans, often including provisions for charities like Stanford. The higher income and capital gains tax rates and the extension of the IRA charitable rollover should make charitable gifts more attractive to many people from a tax perspective.
Please note: this article is not intended as legal or financial advice. Please consult your advisors. If you have questions about charitable giving or planned gifts, contact Stanford's Office of Planned Giving.