Senate Elections Cast Tax Clouds on Top Donor Prospects
Now that Democratic leadership will control the Presidency and House, the January Senate run-off elections in Georgia take on greater significance for high-net-worth donors and prospects. No one knows with certainty how any post-2020 tax changes will impact charitable giving. Time is short for wealthy donors and prospects to make adjustments to their tax and estate plans before any changes take effect.
One thing is virtually certain: income, payroll and estate and gift taxes on the wealthiest Americans are going up if the Senate flips! These individuals are the ones (we like to refer to them as “major gift prospects”) we all cultivate to achieve fundraising goals under the “5/95” rule: 95 percent of our gift dollars come from five percent of the donor count. However, their financial picture may be about to change. Under President-elect Biden’s legislative platform, major tax increases may be in the offing, including:
-increasing the top individual tax rate back to the Obama-era rate of 39.6% from today’s rate of 37%;
-imposing ordinary income tax rates on capital gains now taxed at 23.8% for individuals earning $1 million or more;
-imposing Social Security taxes (with a combined employer and employee rate of 12.4% on the first $137,700 an individual earns from employment) on earned income of individuals above $400,000;
-phasing out the qualified business income deduction for individuals (many professionals who operate under limited liability and Subchapter S companies) earning $400,000 or more;
-rolling back the estate and gift tax exemption from $11.4 million per individual ($22.8 million per couple) to $5.45 million or even $2.0 million (double for couples);
-eliminating the “step-up” in basis of inherited capital gains; and notably, capping the tax benefit for itemized deductions, including charitable contributions, at 28 percent for individuals with incomes of $400,000 or more.
The details of the Biden tax proposals can be found at www.taxfoundation.org. These changes will prompt high-net-worth individuals to rethink their financial strategies, including their charitable giving. Now is an opportune time for college, university and not-for-profit fundraising organizations to make their top donor prospects aware of the changes that may be coming, perhaps as soon as January 1, 2021.
Many of these individuals have financial and tax counsel already looking at these potential changes, but many may not. They may be advised to act quickly to prepay pledges, accelerate their giving or transfer appreciated securities or property, but they must act now. Even if they are unable to do so, they will appreciate your timely communications. So do it today!