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SECURE Act 2.0, Wealth Tax & Non-Income Producing Assets

With the 2022 second quarter upon us, I am struck by how much – and how little – has changed already this year in the world of charitable giving.

Where big changes are concerned, the war in Ukraine and inflation are topping the charts in the minds of many philanthropic Americans. At the same time, questions about tax reform still are never far from our thoughts. We suspect the same is true for you and your clients. 

This month, I’m covering topics related to philanthropy today – right now – as charitable priorities shift in the geopolitical and economic landscape and more light is shed on what we might expect in terms of changes to the tax laws impacting charitable giving. 

Before I dive in, I’d like to draw your attention to a report updated last month by the Congressional Research Service: The Charitable Deduction for Individuals.

Overall, this two-pager is an excellent primer for your clients who want to learn more about the history, policies, and fundamental concepts behind the income tax deduction for contributions made to charities, including community foundations.

You might even find it useful for your own review purposes, as our team certainly did. 

SECURE Act 2.0

The Securing a Strong Retirement Act also includes a range of provisions aimed at helping retirees make sure they do not outlive their retirement funds.

Across the board, individuals, employers, and charitable organizations are celebrating the recent passage of the Securing a Strong Retirement Act of 2022 (House Bill 2954, known as the “SECURE Act 2.0”) in the House of Representatives on March 29, 2022 by an overwhelming vote of 414 to 5.

The legislation is headed to the Senate (which has its own, similar version of the legislation) before it becomes law.

Building on 2019 legislation known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, among SECURE 2.0’s many components is a provision that would allow taxpayers to make a one-time qualified charitable distribution of up to $50,000 from an IRA to a charitable remainder trust or charitable gift annuity.

In addition, the new provision would apply inflation indexing after 2022 not only to the $50,000 limit on this new split-interest distribution, but also to the qualified charitable distribution (QCD) limit (currently $100,000) for direct gifts to qualified charities.

High-Income Earners & Highly-Appreciated Assets

With President Biden’s Build Back Better 2022 budget reconciliation bill still pending, the White House just released its Fiscal Year 2023 budget proposal laying out several revenue-generating components and including a “deficit-neutral reserve fund” to buffer the impact of Build Back Better provisions that may or may not pass the Senate.

One notable tax proposal could impact the way your clients plan for their charitable giving priorities.

A proposed 20 percent minimum tax on high-income individuals, slated in the proposal to become effective for tax years beginning in 2023, is referred to as the “Billionaire Minimum Income Tax.”

Capital gains are the profits you make from selling these investments. In most cases, you’re required to report a capital gain on your federal income tax return.

The tax would be applied to the “total income,” defined to include unrealized capital gains of any taxpayer whose net wealth exceeds $100 million. The mechanism of the tax roughly mirrors a pre-payment of capital gains tax. This is similar to the so-called “wealth tax” proposals in Build Back Better. 

Politics aside, a tax such as the one proposed in the Fiscal Year 2023 budget could mean daunting recordkeeping requirements for those impacted.

Taxpayers would report their assets to the IRS annually, including closely-held assets which would be subject to a statutory valuation method. Taxpayers who qualify as “illiquid,” however, would be permitted to defer tax payments until a sale of certain illiquid assets, perhaps creating an incentive for taxpayers to increase their investments in real estate, closely-held companies and other non-marketable assets. 

If some form of tax on unrealized capital gains becomes law, it could prompt the need for your clients to adopt even more proactive strategies to donate highly-appreciated assets to charitable organizations.

In other words, giving highly-appreciated assets to charitable organizations is already a tax-savvy strategy and may become even more beneficial, depending on whether a “wealth tax” goes into effect and how the regulations interpret the law’s impact on the current charitable giving rules. 

Gifting Non-Income Producing Assets

For clients who rely on fixed-income assets, such as bonds, as well as wages, to cover their living expenses, the inflation pinch indeed may mean fewer dollars available for charitable giving.

Still, for clients who own property, stocks and other assets that tend to go up in value in an inflationary environment, now may be a good time to take advantage of tax-savvy giving of highly-appreciated assets – especially stocks that pay low or no dividends and are not critical to maintaining a client’s income levels.

Giving highly-appreciated stock remains one of the most effective ways your clients can support their favorite charities.

The popularity of donor-advised funds continues to rise due asset flexibility, charitable impact and tax benefits.

That’s because when a taxpayer gives stock to a public charity, such as a donor-advised fund at The San Diego Foundation, instead of selling it outright, the capital gains tax is avoided. Plus, marketable securities are typically deductible at their fair market value, further helping your client’s overall income tax situation.

As you counsel a client who is emotionally attached to a particular stock, don’t let that attachment prevent a client from making a smart tax move.

Your client can donate shares of the highly-appreciated favorite stock and then immediately repurchase the same number of shares. This essentially resets the client’s cost basis to the current price, which could help reduce capital gains taxes on a future sale.

Finally, remind your clients that there are significant differences in the tax treatment of donating cash versus securities.

Currently, the deductibility of gifts of cash to a public charity is limited to 60 percent of adjusted gross income (AGI), versus gifts of non-cash assets to a public charity which are deductible up to only 30 percent of AGI.

Also remind your clients that the maximum benefits associated with giving appreciated assets to a public charity are realized only with long-term capital gains property, in which case the deduction is set at the fair market value of the property on the date of the gift; gifts of short-term capital gains property are valued at cost basis for purposes of calculating the deduction. 

Learn More

For more than 46 years, we have partnered with a large network of wealth advisors, estate planning attorneys, tax planners and other advisors to help high-net-worth clients and families achieve financial planning objectives and charitable giving goals, while maximizing tax deductions.

From establishing donor-advised funds to building your clients’ legacies and providing them with grantmaking guidance on community needs, we act as your team’s charitable partner, supporting your clients through the giving process as you retain complete control of your relationships.

If you’re interested in learning how we can help meet your clients’ financial planning and charitable giving goals, contact me at (858) 245-1508 or jrogers@sdfoundation.org.

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