Update (Part 2): The Fiscal Cliff, Taxes and Charitable Giving

By Mark Hefter, Esq., Director of Planned Giving, American Technion Society and President-Elect, Association of Fundraising Professionals, Greater NY Chapter

Please refer to the chart at bottom showing, under the tax law that expired Monday night (“2012” in the chart), under the law passed by Congress yesterday (“2013”) and if all the Bush tax cuts had expired (“No Bush”) for the following:

1.   The difference in tax savings when a married couple with AGI of $1,000,000, all ordinary income, makes a charitable gift of $500,000 cash (the maximum gift they could make under the 50% of AGI limitation on charitable gifts)

2.   The difference in tax savings when a married couple with AGI of $1,000,000, all capital gains or dividends, makes a charitable  gift of $500,000 cash.

3.  How much tax the same couple would pay if they make no gifts.

4.   How the couple’s heirs would fare gift and estate tax-wise, if the couple have a gross estate of $50 million and give $2 million.

The details concerning how the figures in the chart were derived should be of interest only to an accountant or tax lawyer.  What should be clear from the chart is that the hypothetical couple is better off today than if all the Bush tax cuts had expired.  It should also be clear that the differences for this couple between last year and this year should be minimal. They might be encouraged to make significant taxable gifts to shelter their excess income from the new 39.6% tax bracket.

There may be individuals or families significantly affected by the new legislation, and those looking for an excuse (even a non existent one) not to give may now have one.  However, for most high income taxpayers, the new law provides little, if any income tax incentive or disincentive for charitable giving.  Therefore, as several surveys have already indicated, most wealthy Americans will likely continue to make decisions about their charitable gifts without serious regard for marginal changes in the tax law.

You should also note for most married taxpayers with less than $300,000 AGI, the 2012 tax law continues in its entirety.  The new law affects them not at all with regard to their charitable giving.  For those over that threshold who also have taxable income under $450,000, the only difference between Monday and today is that they are subject to the 3% haircut on itemized deductions.

Married taxpayers with taxable income of over $450,000, will also pay additional tax as well.  They will also reap bigger tax savings from their deductible charitable gifts.

2013 TAX CHART

(M: million and k: thousand)

ORDINARY INCOME                      2012            2013           NO BUSH

Income                                                 1M               1M              1M

Sample Gift ***                                  500k           500k          500k

Tax Savings                                         175k            198k          198k

Less Loss of Deduction****              0                21k             25k

Additional Tax*                                   0                 3k              30k

Net Savings                                          175k           175k            143k

CAPITAL GAINS

Income                                                 1M                1M              1M

Sample Gift                                         500k             500k         500k

Tax Savings                                         75k               100k         100k

Less Loss of Deduction                     0                   21k            21k

Additional Tax**                                0                   3k              3k

Net Savings                                         75k               76k            76k

NO GIFT ORDINARY INCOME

Income                                                 1M                1M               1M

Taxes*                                                  320k            345k            375k

NO GIFT CAPITAL GAINS ONLY

Income                                                 1M                1M               1M

Taxes**                                                150k             175k            200k

ESTATE/GIFT

Gross Estate                                      50M              50M           50M

Taxes**                                              14M               16M           27.5M

2 Kids                                                 36M               34M           22.5M

Sample Gift                                       2M                 2M             2M

Less Tax Savings                             700k              800k          1.1M

Net to Kids                                       34.7M            32.8M       21.6M

 * All tax figures in this chart are approximate, rounded to the nearest even number

** Analysis does not include additional 3.8% surcharge effective 01/01/2013

*** Assumes maximum gift of cash up to 50% AGI limit.

**** Resulting from reimposition of phase out of itemized deductions effective 01/01/2013

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