Today we welcome back a special guest: Stelter’s Senior Gift Planning Consultant, Lynn M. Gaumer, J.D. In her role, Lynn keeps a close watch over tax legislation, research and trends that could affect your planned giving program.
A New Beginning. A New Administration. And a Look Ahead.
President Biden and his team set lofty goals for his first 100 days, including minimizing the spread of COVID-19, increasing vaccine distribution and laying the groundwork for uniting the country. In the meantime, a 50-50 Senate will be busy with the impeachment trial of former President Trump and confirmation hearings for Biden’s cabinet members.
Despite the many challenges, I suspect that Biden is well aware that first-term presidents have a narrow window of opportunity to get legislation passed regarding high priorities. For this administration, those priorities include tax reform.
Now with a Democratic White House and House of Representatives and an evenly divided Senate—Vice President Harris represents the tiebreaking vote—I believe we will have enough congressional support to see changes in the U.S. Tax Code during the Biden administration. But when? Let’s look at a little history.
Historically, first-term presidents have a brief period of time to get major legislation they support enacted. Congress passed President Reagan’s Economic Recovery Tax Act in August 1981, seven months after he took office. President Clinton signed tax reform in August 1993, also seven months after he was inaugurated. President George W. Bush signed the Economic Growth and Reconciliation Act in June 2001, five months after he became president. President Obama signed the American Recovery and Reinvestment Act in February 2009 and President Trump signed the Tax Cuts and Jobs Act in December 2017, both within their first year of serving as president.
Even with history as our guide, I don’t expect quick action on tax changes. President Biden is (rightfully) focused on more important things. But let’s look ahead…
How This Impacts You
Planned giving professionals need to keep informed of what is happening in Washington, D.C., and know how federal laws might change if President Biden and Congress come together to pass tax reform. We are here to help. I put together a summary of some of the proposals being discussed—particularly as they relate to your organization and your donors.
|President Biden’s Tax Proposal|
|Income Taxes||Retains the current income tax rates of 10%, 12%, 22%, 24%, 32% and 35%. Increases the top income tax bracket from 37% to 39.6%. Lowers dollar thresholds, especially those in the upper tax brackets.|
|Itemized Deductions||Caps the benefit of itemized deductions to 28% of the amount of the deduction for those earning more than $400,000. Restores the PEASE limitation and reduces the value of itemized deductions by 3% of the amount by which a taxpayer’s adjusted gross income exceeds $400,000.|
|Capital Gains||Retains three brackets (0%, 15% and 20%). However, for those with income above $1M, taxes the long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6%.|
|Step-Up in Basis||Eliminates the step-up in basis rule of inherited property at death.|
|Estate Tax||Reduces the estate tax exemption to $3.5M per person or reinstates the $5M exemption in effect prior to enactment of the Tax Cuts and Jobs Act. (The current estate tax exemption is $11.7M per person.) Increases the gift and estate tax rate from 40% to 45%.|
What It Means to Nonprofits and Donors
Your donors may look to you for insights on how tax reform affects their philanthropic goals.
Four key takeaways:
- A higher top income tax rate for those making more than $400,000 per year, along with a readjustment of the tax brackets, may lead to additional giving or bunching of gifts. These individuals may take advantage of itemizing for greater tax savings. This may also lead to a greater interest in qualified charitable distributions for higher-income donors—especially for those who take required minimum distributions. They may prefer to make gifts directly from their IRA to avoid being taxed at the higher levels.
- A cap on the value of itemized deductions may incentivize higher-income donors to make gifts prior to enactment.
- A higher capital gains tax for those earning more than $1M per year will likely lead to increased interest in outright gifts of appreciated property or bargain sales, as more taxes can be avoided through a charitable gift. It could also increase interest in charitable gift annuities or charitable remainder trusts by deferring capital gain recognition.
- A lower estate tax exemption may shift the focus from income tax planning to estate tax planning. This could mean more interest in bequests, beneficiary designations and charitable lead trusts.
1. Count on Stelter!
We will keep a close eye on tax law changes and keep you informed. In the meantime,it may be difficult to determine what’s next. But it is critical that your organization stays on donors’ minds. Messaging remains important. Don’t stop showing your human side.
2. Take time to review and revise your messaging.
Reflect any new laws and, more importantly, continue to express empathy.
TIP: With tax reform a possibility in 2021, be mindful of ordering large quantities of printed marketing materials that include current tax rates and are designed to have a long shelf life.
For more relevant marketing tips, take a look at our recent blog, “The Future of Planned Giving: 5 Marketing Trends for the New Year.”