Expiring Tax Exemptions and Proposals to Limit Charitable Tax Deductions May Mean Now is the Time to Give

Next year may bring some unwelcome changes that will impact how we handle our charitable donations and financial gift giving.  When Congress extended the Bush Tax Cuts at the end of 2010, an unexpected benefit was created when the exemption amount for imposition of the Federal gift tax was increased to $5 million in 2011 and $5,120,000 in 2012.  This means that an individual taxpayer could make a lifetime gift of up to $5,120,000 in 2012, and pay no Federal gift tax, provided he has not given any previous large gifts that must be counted toward the gift tax exemption amount.  Many wealthy taxpayers have already taken advantage of this limited time offer, and transferred significant amounts to children and other family members without incurring the 35 percent Federal gift tax.  However, unless Congress takes action, after December 31, 2012, the gift tax exemption amount will fall to $1 million and the tax rate will increase from 35 percent to 55 percent.

Although the fate of the Bush Tax Cuts and taxes in general is currently up in the air, we do know that until December 31, 2012, a taxpayer can transfer a significant amount of wealth to children or other beneficiaries without paying substantial gift taxes, and such gifts can also save on estate and inheritance taxes in the future by permanently removing assets from the taxpayer’s estate.

Charitable donations may also be further impacted in 2013.  As governmental budgets are stretched, charitable organizations must increasingly step in to provide critical services and assistance for individuals and communities.  In 2011, Americans gave nearly $300 billion in charitable donations, despite a continuing economic recession.  Unfortunately, many legislators are now considering reducing the long-established Federal tax deduction for charitable contributions as part of a plan to reign in national debt.  Proposals in congress seek to limit the value of the deduction for charitable gifts in order to increase tax revenue, and President Obama has proposed capping all itemized deductions at 28% for individuals who make at least $200,000 a year or couples with annual income of at least $250,000.  It is estimated that these proposals could reduce charitable donations by as much as $7 billion per year.  This conclusion is supported by recent research reviewed in The Chronicle of Philanthropy, which found that the charitable tax deduction does have a significant effect on how and why Americans give to charity.  For more information, visit www.philanthropy.com.

Although no decisions for 2013 have been made to date, many taxpayers would be well advised to make any planned charitable gifts in tax year 2012, while current rules for charitable deductions are in place.  Now is the time to talk with your financial planner, attorney or accountant to determine an appropriate course of action before the end of the year. A review of income and potential tax liability with your tax advisor can help determine whether now is the time to make that gift to a family member, favorite school, charity or religious institution.