#buildbackbetter

By:  Michael Allbee, CFP®, Senior Portfolio Manager

Did you miss out on #GivingTuesday? You still have time to take advantage of two temporary perks for cash gifts to charities before they expire at year-end.

The first perk for those that itemize deductions, allows 100% of cash gifts (including by check, credit card or debit card) to be deductible in 2021 (this also applied for 2020). Normally the limit is 60% of adjusted gross income (AGI). So, a person with $200,000 AGI, can now deduct up to $200,000 if charitable gifting is made in cash, where normally they would be capped at $120,000 (60% limit). These charitable contributions CANNOT be used for Donor Advised Funds or 509(a)(3) supporting organizations.

For those that already maxed out your charitable gifting (up to $100,000) from your traditional and/or inherited IRAs by using Qualified Charitable Distributions (QCDs) and want to gift more to a charity, you may want to consider taking the remainder gift from your tax-deferred retirement account (if you are over age 59.5 to avoid penalties) which would increase your AGI since the distribution is treated as taxable income but simultaneously offset that income via the 100% deduction for the cash gift. This strategy would be especially effective if some of the IRA changes under consideration before Congress become law. Currently, in its Build Back Better legislation, Congress is proposing restrictions on so-called “mega IRAs” with balances over $10 million. The legislation would mandate required distributions of 50% of the amount exceeding $10 million and require distributions of 100% of the IRA balance exceeding $20 million—potentially creating major tax events for some individuals in the coming years.

The second expiring perk is the opportunity to deduct cash gifts to eligible charities of up to $300 for single tax-filers and $600 for couples against taxable income, even if you claim the standard deduction (great news for the 90% of households that take the standard deduction each year). Let’s say a married couple with an effective tax rate of 25% jointly donated $750 throughout the year. If they take the standard deduction, they’d be able to deduct the full $600, lowering their federal tax liability by $150. Keep in mind that donations made to individuals are not tax-deductible (i.e., GoFundMe campaigns).

Charitable giving provides you the opportunity to create a meaningful legacy and support the causes that are important to you. Consider speaking with your financial professional at BFSG for guidance around your philanthropic goals and assistance on the execution.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

In case you missed this week’s BFSG’s Fall Webinar Series, “Tax Planning: Understanding Biden’s Tax Proposals”, you can now watch the replay by clicking here.

Our guest speaker Erica York, an economist with the Tax Foundation, reviewed the current Build Back Better tax proposals and we discussed tax strategies to help you reduce your taxes for 2021 and beyond.

Visit BFSG University on YouTube to see the replays from our most popular webinars, plus some additional short videos.

With a new president often comes new agendas and philosophical changes. This is especially true with the Democrats controlling the House and picking up important seats in the Senate. President Biden is expected to pitch his “Build Back Better” infrastructure plan on Thursday and how to fund the estimated $3 trillion price tag.

Democrats will be forced to choose between budget reconciliation, which requires only a simple majority in each chamber for passage or securing at least 10 GOP votes in the 50-50 Senate.

Below are four potential changes to taxes that we are watching closely:

1. Increase in Income Tax for the Affluent

For those in the highest tax bracket (currently 37%) there is chatter in DC to raise it back up to the previous level of 39.5% or higher. The tradeoff they are considering is removing the State and Local Tax (SALT) deduction limit of $10,000 or more likely raising the SALT limit. This would be a great benefit for homeowners in high-tax states like California.

2. Increase in Corporate Tax

The corporate tax rate was lowered from 35% to 21% under the Tax Cuts & Jobs Act (TCJA) law in 2017. Many of the individual tax provisions of the TCJA sunset and revert to pre-existing law after 2025, however, the corporate tax rates provision was made permanent. Biden has previously voiced support for raising the corporate tax rate to 28%.

3. Changes to Estate Taxes

There is some concern that the new Congress may want to make significant changes to estate taxes.

Some of the proposed changes could include:

• Reducing the lifetime exemption back to $5 million (adjusted for inflation). Currently, the limit is $11.7 million per person but sunsets in 2025 (see the discussion above about the TCJA). Lowering this exemption would also impact gifting and those subject to generations skipping taxes (GST).

• Removing the ability of heirs to get a step up on a cost basis. For example, under current rules assume a $1 million after-tax investment has a cost basis of $300,000. Currently, the heir gets a new cost basis of $1 million and would not pay capital gains on the inheritance. There is talk of this being changed so the cost basis for the heir stays at $300,000 so they would have to pay capital gains taxes on the $700,000 in gains where under current law they do not have to.

4. Raise Social Security Tax Limits

Under current law, individuals pay 6.2% taxes for Social Security on the first $142,800 in earnings for 2021. Earnings over this amount are not subject to Social Security taxes.  There is speculation that this number could be raised to help meet the social security shortfall. There is also speculation about adding a new tier for payroll tax contributions for incomes over $400,000. There could be additional changes to the Medicare taxes as well. Read here about other possible changes to Social Security and Medicare.

5. Other Potential Changes        

There has been some discussion on making changes to popular planning strategies as well. There has been speculation but nothing concrete as of yet. Aside from federal changes, we may see more changes at the state level as many states are struggling with budgets in light of the pandemic and they will be searching for additional sources of revenue (read more taxes). This could lead to higher property or income taxes, or other potential changes like developing estate taxes or taxing Social Security. For example, California recently passed Prop 19 possibly triggering higher property taxes for inherited property.

Again, this is a tough item to predict but certainly something we are watching closely.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.