How Obama’s Budget May Affect Charitable Gifts

Charitable Gift Planning

Probably an increase in 2010 and a substantial drop thereafter.

From Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:
President Obama has released his controversial budget.  The proposal
that affects charitable organizations the most is that the tax benefit
that upper-income taxpayers would receive from their charitable gifts
would be limited to 28%, beginning in 2011.  The same 28% limit would
also apply to tax savings from the home mortgage interest deduction.
Also the highest marginal tax rate would increase from 35% in 2010 to
the Clinton-era rates of as high as 39.6% in 2011.
So, if in 2011 a rich person gets an extra $100 of income and donates it
to charity, the extra $100 would be subject to a nearly 40% federal tax
rate but the charitable gift would only produce a $28 tax saving.  The
rich person must spend nearly $12 in taxes to make the gift.
Five observations:
(1) Expect wealthy donors to prepay in 2010 contributions that they
would normally make in 2011 and 2012.  The nation’s charities
experienced this when Ronald Reagan lowered the highest tax rates from
50% to 28% as part of the 1986 Tax Reform Act.  Gifts surged in 1986 but
fell in 1987.  So, if the proposal is enacted, expect major gifts to
decrease in 2011 since some donors prepaid their gifts in 2010.
(2) There could be a boon in grantor charitable lead trusts in 2010
since a donor can get a charitable income tax deduction in the year that
the charitable lead trust is funded rather than in the year that the
lead trust makes its charitable gifts.  Visualize it: the donor gets a
2010 charitable tax deduction and saves 35% yet the charity receives
gifts in later years when the donor would have only had a 28% deduction.
The donor and the charitable lead trust will likely increase investment
in tax-exempt municipal bonds in future years to avoid the higher 39.6%
marginal tax rate.
(3) If enacted, then 2010 will be a boon year to establish a private
foundation or a donor advised fund.  A rich person can get tax savings
at a 35% rate in 2010 and then have grants flow out in later years when
the charitable gifts would have only produced a 28% rate tax savings.
(4) “Charitable IRA Rollover” will become especially attractive in 2011
and later years, if it is in fact extended.  Rich people will really
want to keep taxable IRA distributions out of their income.  They won’t
mind the fact that they are losing a charitable income tax deduction in
2011.  It would have only saved 28%.  Charitable IRA rollover could
effectively save them the 12% on each gift.
(5) None of this might happen.  The President proposed a budget, but it
is Congress that actually makes the budget and changes the tax laws.  It
will be interesting to see how proposal works its way through Congress.
The complaints and the lobbying have already started.
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