Year End Charitable Planning – What’s a Donor to Do?
For those of you who may not have noticed, Charitable Nation has been on a self-imposed two month hiatus as your intrepid author has been otherwise occupied with a large volume of extended client tax returns. Virtually by definition, those taxpayers who extend their filing deadlines have the most complex tax situations, so the post-Labor Day time period is, for accountants, one version of hell on earth. Slogging through these returns caused us to wonder about what was to come next year – what would be radically different, mildly different or unchanged in the tax code. Would there be opportunities for creative planning or will the endgame be to try to minimize the damage? Toward that end I offer up some opinions and thoughts, many of which could be flat out wrong, and all of which are my own opinions and not necessarily those of my partners at WithumSmith+Brown:
- Will there be tax reform in the coming year? Reform may be too strong a word. Because the word “compromise” has been rendered a curse word by some of the more extreme members of Congress, I am not so sure that they will be able to come together long enough to produce any kind of meaningful comprehensive reform. But I do expect to see some changes around the edges and, yes, even an increase in overall taxation regardless of who wins the election (remember George H.W. Bush’s famous line “Read my lips: no new taxes.”). However, I will leave it to my partner Tony Nitti to pontificate about the particulars in his excellent blog Double Taxation. The short answer: Expect to see taxes go up but not necessarily uniformly nor out in the open and easy to see. Our tax system is nothing without its smoke and mirrors.
- What will this mean for charitable contributions? Another imponderable, but one that is worth thinking/worrying about, particularly if you are a policy wonk. In the past, President Obama has proposed limiting the value of all itemized deductions for higher income families, including the deduction for charitable gifts. Governor Romney has suggested a 20% decrease in tax rates across the spectrum and a corresponding rollback of unspecified deductions and credits. So, I think it is safe to say that, in either camp, the charitable deduction is on the table. Now, is it “seriously” on the table or just “technically” on the table? Is cutting or limiting the deduction for charitable giving a politically viable alternative? Maybe, maybe not. In these tough times when everyone is worrying about that fiscal cliff, it would not surprise me to see some tinkering with this very sacred cow.
- So what is the right approach for income tax planning in 2012? The approach is the same every year. If you expect your tax rate to go up in the following year, you should accelerate income into the current year and defer deductions. If you expect your tax rate to go down, you do just the opposite. If you expect it to be flat, you generally accelerate the deductions and do nothing with the income.
- But what do you do if you think that rates are going up and deductions will be limited at the same time? A bit of conundrum, no? Basically, you have to assess the probabilities of these changes. If you believe that your rate will increase next year and that the deduction for charitable contributions (or any others you may be considering) will stay the same, then you will opt to accelerate income and defer the deductions. If you believe that deductions will be negatively impacted next year you may decide to accelerate your deductions to preserve their value this year. But key is “what you believe.” There is no certainty this year with tax planning.
It’s nice to know that you can leverage your charitable dollars through your tax return and time your income and deductions to optimize your financial situation. Frankly, though, I would not get too obsessed about this, particularly with charitable dollars. As one would expect, contributions tend to ebb and flow with the economy, but taxes themselves do not appear to be too strong an influencer in people’s decision making process (just don’t tell the policy makers!). When it comes to philanthropy, I suspect that most people consider the good works done by the charities more important than the tax deduction.