The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) serves up $350 billion in tax cuts and, according to the Treasury Department, will provide 91 million taxpayers with an average $1,126 in tax relief.
The Act’s highlights include lower income tax rates, a 15% cap on dividend and capital gains taxes, elimination of the “marriage penalty,” and an increase in the child tax credit. Businesses also receive some relief in the form of an expanded “bonus” depreciation deduction and increased Section 179 expensing. Much has been written about these changes and how they may impact your clients’ investments, but here we’ll explore the implications for charitable giving.
Our research shows that affluent clients are still very much interested in transferring wealth–both to their loved ones and to the charities of their choice. Many clients prefer to make outright gifts by donating cash or appreciated property directly to charities. Others find it advantageous to make gifts by retaining an interest so that an income stream is created for themselves or other beneficiaries for a specified period of time.
As with any planning strategy, you should start by identifying a client’s specific objectives in order to recommend a solution that best fits their needs. We’ve found that the following questions are a good starting point when it comes to charitable giving:
o Why do you want to make this gift?
o How much control over the assets do you want in the giving process?
o When do you want to gift?
o How much do you want to gift?
Assets Given Outright
The new tax laws impact a number of charitable-giving strategies. First, let’s consider the charitable deduction. In short, these are itemized deductions that reduce a client’s taxable income, generally dollar for dollar. Although the marginal income tax rates have decreased, your clients will still receive a tax benefit from the contribution. As in the past, if there are years when you can expect your client’s taxable income to be higher, you may want to time your client’s charitable contributions to coincide with those years.
The lower capital gains rate may alter the type of assets one uses to make contributions. Donating appreciated stock with a low cost basis has been an extremely popular way to make charitable contributions. In addition to avoiding the capital gains tax, a client could also receive a tax deduction on the market value of the shares. With the new tax laws, your clients still get the tax deduction but the top capital gains tax is now 15% rather than 20%. Therefore, from an after-tax standpoint, you should consider what is the best use of those assets.