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What DAF Donors Should Know About Potential Tax Policy Changes

Author Gil A. Nusbaum, General Counsel

October 26, 2021

An effective philanthropic strategy combines both a donor’s passion to give and some sound financial planning. While donors have responded generously to increased need in the charitable sector over the past two years, the pragmatic decisions around where, when, and how to give are also influenced by financial position and changes in law or public policy.

As the calendar year draws to a close, multiple pieces of legislation are under discussion in Washington, including tax policy changes, which have the potential to impact the short-and-long-term giving strategies for you or your clients. As you discuss philanthropic goals for the new year and beyond, here are answers to some frequently asked questions about potential changes to current tax policy.

Will my tax rate change?

High-income earners, defined as individuals earning more than $400,000 annually and married couples earning more than $450,000 per year, could see their marginal tax rate rise under proposed laws. The highest tax bracket rate may rise to 39.6%, up from the current rate of 37%.

Will the capital gains tax rate change?

High-income earning taxpayers currently pay a 23.8% tax on long-term capital gains, comprised of a 20% capital gains tax and 3.8% surtax on net investment income. This tax is triggered when selling appreciated securities held longer than one year. New proposals, if enacted, would treat capital gains the same as ordinary income for Americans earning more than $1 million per year, or married couples earning more than $2.5 million annually. This change would mean that the top effective tax rate for long-term capital gains would increase for those taxpayers to 43.4%, a new top rate which reflects the 39.6% ordinary income tax rate, plus the 3.8% surtax.

Would any new changes affect estate planning?

Under current law, the cost basis of assets, such as stocks, bonds or real estate, is adjusted to fair market value on their owner’s death. Called a “step up basis,” this means the estate (or the beneficiaries of the estate) will only owe federal income tax on the subsequent sale of the assets to the extent of gains in excess of the fair market value of the assets on the original owner’s date of death. With certain exceptions, the proposed tax law changes would treat death as a recognition event and trigger capital gains tax on unrealized gains in excess of $1 million ($2 million for married couples) with respect to appreciated assets owned at death.

With regard to giving away wealth prior to an owner’s death, there are no current changes to the federal transfer taxes under discussion. Currently taxpayers are exempt from federal gift and estate taxes on any combination of estate bequests or gifts up to $11.7 million ($23.4 million for married couples).

How will corporate taxes be affected?

Changes to the existing structure would see the corporate tax rate increase to 28% from its current level of 21%.

What changes have been enacted, if any?

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted last December, included several provisions to help individuals and businesses who give to charity.

  • For individuals who do not normally itemize deductions on their federal returns, a limited deduction up to $300 for cash contributions ($600 for married couples filing jointly) to qualified charities in 2021 was introduced.
  • Individuals who do itemize deductions may claim a deduction for charitable contributions made to qualifying charitable organizations. The limits vary by the type of contribution made and the IRS classification of the charitable organization receiving it, and typically range from 20% to 60% of adjusted gross income (AGI). The law now permits individuals to claim a charitable deduction up to 100% of their AGI, for cash contributions to certain qualifying charities made during calendar year 2021. Contributions to private foundations, supporting organizations and donor-advised funds do not qualify for the expanded limit.
  • For businesses, the law now permits C corporations to claim an increased deduction up to 25% of taxable income for cash contributions they make to eligible charities during calendar year 2021, up from a previous limit of 10%.

How will these changes affect my philanthropic goals?

Changes to federal tax law provide an excellent opportunity to review your own personal finances, including how you reach your charitable giving goals. Despite the potential for new rules and regulations, donor-advised funds (DAFs) will continue to be a tax efficient way to give and preserve more of your resources for charitable giving. It is impossible to predict the future, but sound philanthropic and financial strategies are built upon being aware of multiple eventualities and outcomes.

Though the political situation around tax policy will continue to change, good planning allows donors greater flexibility in how their philanthropic efforts can continue to make the greatest impact.

Gil Nusbaum is NPT’s General Counsel. He is responsible for a wide variety of general corporate legal, tax and risk management matters and for overseeing NPT’s illiquid gifts program.

Note: The state of new tax policy and related legislation is currently evolving and liable to change in its final form. We will update this page when there are new developments to report, so please check back often.

NPT does not provide legal or tax advice. This blog post is for informational purposes only and is not intended to be, and shall not be relied upon as, legal or tax advice. The applicability of information contained here may vary depending on individual circumstances.