• September 16, 2014

Deduction Uncertainty Fuels Giving by the Wealthy

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Richard White/Chronicle of Philanthropy

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Richard White/Chronicle of Philanthropy

Many big donors are so concerned Congress won’t work out a deal on the fiscal cliff—and will allow tax rates to rise—that they are giving more than they planned this year to charity. Wealthy people are not just concerned about rates rising but also fearful that Congress could limit the write-offs affluent people receive for their charity gifts.

While some charities report a big surge, others say donors are taking the opposite approach: They think rates will rise next year, but the charitable deduction will be fully available. If that happens, donors could get a bigger tax savings by giving next year, so it’s tax-savvy to hold back now.

Among nonprofits with the biggest lift in giving by people worried about higher taxes and lower deductions in 2013 are donor-advised funds. The funds allow people to quickly set up charitable accounts and earn immediate tax advantages, but postpone decisions about which charities ultimately get their money.

This year, for example, Angela Raitzin, a financial planner at Morton Capital, in New York, is following her own advice to wealthy clients: Set aside extra money for future charitable giving and get a tax break now, while you still can.

She is donating stock shares to create a donor-advised fund, a type of charitable checking account that she’ll use to make gifts over the next three years. She will get a tax deduction worth the full market value of the stock now, a write-off that could be less generous if she waited until next year. Plus, she avoids the capital-gains tax she would owe by selling the stock, which has risen sharply in value since she bought it.

Several nonprofits are benefiting from people who think like Ms. Raitzin:

• At Northwest Memorial Foundation, a hospital fundraising arm in Chicago, two donors are giving earlier than they planned to take advantage of tax breaks likely to be limited in 2013, says Stephen Falk, the foundation’s president. In one case, a donor who pledged $1-million over five years is accelerating the gift and paying it all off before December 31 to lock in his tax deduction.

Meanwhile, another donor is rushing to establish a $500,000 gift annuity before the year ends, Mr. Falk says.

The annuity donor, Mr. Falk says, “is going ahead this year because of concern about the deductibility of the gift.”

• With two weeks remaining in 2012, the University of Alabama has seen a 30-percent increase in year-end gifts of appreciated stock, after sending a brochure to encourage such gifts from 8,600 wealthy donors, says Phillip Adcock, assistant vice president for development.

“Donors are uncertain about next year; thus, they are taking the approach that a bird in the hand is better,” Mr. Adcock says.

• As of mid-December, the Schwab Charitable Fund, the nation’s second-largest donor-advised fund, reported a 63-percent jump in the number of new accounts established by donors this year compared with 2011. Two other large donor-advised funds, Fidelity Charitable and the National Philanthropic Trust, say their accounts are growing rapidly also.

“Things are really busy,” says Eileen Heisman, president of the National Philanthropic Trust. “It will probably be one of the best giving seasons ever.”

Donors, she adds, “can store two to four years of charitable giving in one year, knowing they will get the maximum deduction. It is interesting to see people reacting to proposed public policy.”

Estate Taxes

Yet another fiscal-cliff concern prompting some donors to give more to charity now is the likely expiration of the estate-tax exemption, says Jill Dodd, a San Francisco attorney who advises wealthy people with a net worth of at least $30-million.

Donors can now give up to $5.1-million, or $10.2-million per couple, tax-free to heirs, either during their lifetimes or at death. But unless Congress intervenes, starting on January 1, they will be able to give away only $1-million tax-free; everything else in their estates would be taxed at a rate of 55 percent.

As a result, Ms. Dodd says, wealthy families “are doing massive amounts of giving because they want to decrease their taxable estate.” While most of that giving is to heirs, Ms. Dodd says, the anticipated change to the estate tax has prompted many donors to review their charitable plans, and some are making additional gifts this year.  

A few months ago, Ms. Dodd and her colleagues provided wealthy clients with a tax-planning advisory titled “Why 2012 is a Great Year to Make a Philanthropic Gift.”

The material explains a provision of the new health-care law that will impose a 3.8-percent tax on investment income of affluent people and another proposal to increase the capital-gains tax from 15 to 20 percent next year.

That’s why Ms. Dodd and her colleagues are advising clients to sell appreciated stock, art, real estate and other valuable items this year to take advantage of lower capital-gains taxes—and to take dividends and other income to avoid higher tax rates next year. Making a large gift that provides a charitable deduction, Ms. Dodd tells clients, is one way to reduce taxes owed on any additional income taken this year.

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