This post is written by Jordan Keller of Dark Horse CPAs. Jordan has broad experience providing comprehensive tax and accounting services across many industries and specializes in serving nonprofit organizations.
President Biden’s proposed tax plan has raised a number of questions, particularly from charitable organizations that rely on tax-deductible donations to fund their efforts. Although donating to charity to reduce tax liabilities is not a new concept, Biden’s proposed tax increases might further incentivize high-earning donors to consider this option.
It’s important to note that this proposed tax plan has not yet been passed by Congress, and there may still be major changes made by the Biden administration, but this post will help your nonprofit understand the implications of his current proposal by breaking down the policies that could impact charitable giving and what they mean for your organization.
Proposed Policies Your Nonprofit Should Note
On April 28, President Biden proposed his $1.8 trillion American Families Plan, which is intended to grow the middle class, expand the benefits of economic growth to all Americans, and reinvest in the future of our country’s economy.
To help fund this plan, the president has proposed to boost the taxes on the U.S.’s most affluent individuals and families in a number of ways, including raising the capital gains tax for people earning $1 million or more, increasing the corporate income tax rate, and eliminating the stepped up basis of assets for estate taxation.
Proposed Increase of the Top End Capital Gains Tax
The first key component of the president’s proposed tax plan is to raise the top end of the capital gains rate to 39.6%, which is nearly twice as much as the current 20% tax. If you include the net investment income tax, the top rate jumps to 43.4%.
The intention is that Americans in the top tier tax bracket should pay the same rate on long-term capital gains as they do on ordinary income. As it stands, the top marginal tax rate on ordinary income is 37%, but the president has proposed to increase this rate to 39.6% as well, which would apply to 2022 income above $452,000 for individuals and $509,300 for joint filers.
Proposed Increase of the Corporate Income Tax Rate
Secondly, President Biden has proposed to increase the corporate income tax from 21% to 28% and impose a 15% minimum book tax on large corporations with over $100 million in book income (a company’s financial income before taxes which is publicly reported to its investors and shareholders).
These proposals would repeal the changes to the corporate tax made by the Tax Cuts and Jobs Act (TCJA) in late 2017 with the goal to target gaps between financial and taxable income and ultimately promote tax fairness. This change could help generate the revenues to finance needed investments and reduce the disproportionate share of tax benefits received by corporations and households at the top.
Proposed Elimination of the Stepped Up Basis for Estate Taxation
The last key component we’ll be covering is President Biden’s proposition to eliminate the stepped up basis, which currently minimizes the capital gains tax on an asset when it’s sold by the person who inherited it.
Under current law, the stepped up basis states that when the inheritor sells the asset they’ve been gifted, they only pay capital gains tax on the difference between the selling price of the asset and the fair market value at the date of inheritance, rather than the difference between the selling price and the original price it was purchased for by the decedent.
President Biden’s proposal would change the treatment of the capital gains tax on assets when people pass away by requiring that the estate of the deceased person pay a 39.6% tax on the total acquired capital gains, from the date it was purchased to the date of the owner’s death, before it’s gifted to the designated beneficiary.
The goal here is to capture tax revenue from very well-off people who may not have assets valuable enough to be subject to the estate tax, which currently allows for an individual to leave $11.7 million to their heirs and pay no federal estate tax when it’s passed down. President Biden is proposing to restore this limit to its 2009 level of $3.5 million per person at a 45% tax rate.
Continued Impact of the CARES Act on 2021 Charitable Giving
Under the 2020 CARES Act, the maximum 60% tax deduction for cash donations was lifted and it will remain that way for donors in 2021. Anyone who gives up to $300 in cash, whether they itemize or not, can deduct up to 100% of their adjusted gross income (considered an “Above the Line” deduction).
The adjusted gross income for cash contributions also remains increased for corporate donors, who can now deduct up to 25% of taxable income. This is a major increase from the 10% deduction prior to the CARES Act.
New this year, any joint filers who aren’t itemizing will also be allowed to take an Above the Line deduction up to $600 in cash contributions. President Biden has proposed making these deductions permanent to continue incentivizing charitable contributions.
Why These Proposed Tax Reforms Matter for Your Nonprofit
Reducing tax liabilities through charitable contributions is a longstanding practice, but the proposed tax rate increase for both individual and corporate taxpayers could further incentivize charitable giving. In addition, elimination of the stepped up basis could fuel a new conversation between you and your donors about the benefits of planned giving.
By gifting an asset to a charitable organization, donors can hold onto the full appreciated value of that asset, take the tax deduction, and avoid the capital gains rate. Keep this in mind when connecting with your donors who might be impacted by this tax reform in order to strategize your appeals and target the appropriate audience.
Jordan Keller has broad experience across many industries in both accounting and tax and has deep knowledge of the following industries: real estate, health care, nonprofit, retail and eCommerce, construction, and manufacturing. Learn more about Dark Horse CPAs.
The views expressed are not intended to be legal or accounting advice and are not endorsed by Classy, Inc. (“Classy”). Further, the content is not the advice of Classy nor any of its personnel, and neither Classy nor the author bears any responsibility for the content of this post. The information included in this post has not been verified by Classy for accuracy.
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