Taxes and Charitable Giving in the U.S
The potential impact of Biden’s new tax proposals on Charitable Giving in the United States
Nothing has been more certain in this life other than Death and Taxes. While taxes have been certain, they have never been consistent almost in all parts of the world. Especially in the United States, the taxation system that is there today is the direct result of a series of reforms and ever-changing tax models.
“Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes” — Benjamin Franklin
There are very few things in America that unite people as much as their hatred towards taxes. While hatred towards taxes does not necessarily mean that people do not want to pay taxes, rather it is because most people do not fully understand how taxes work. And, when we do not have control over something, it is easy to hate it. Although the Presenditial elections are over, the word “Tax” still remains a buzzword in the news media ever since the recent breakout of Biden’s proposed tax plans. Although these tax policies are yet to be implemented, as we are approaching the Tax season, the internet is flooded with queries to protect income from taxes. Charitable giving has become a great tool for reducing taxes while also allowing people to serve a cause that they believe in.
The taxation policies have always provided price subsidies for charitable giving, and this is a great incentive for people to donate to charities. As the charities started accepting appreciated assets, the price of charitable giving went down even further as this is an easy way to avoid capital gains on appreciated charitable donations.
Charitable donations are treated as a consumption good with positive externalities
Changes in proposed tax policy and the cost of charitable giving:
President Biden’s new proposal would raise the top tax rate from 37% to 39.6% and reduce the current income thresholds for top earners. In other words, the term “rich” is being redefined in terms of income levels. While the aim is to tax the rich and wealthy more, this tax proposal is doing just that. This also means, now there are more people in the “rich” income bracket with higher income tax rates. Hence, the number of people strategizing their optimum taxes to reduce taxes on their income is also on the rise.
But the reason why charitable giving is expected to grow is because of the proposed capital gains tax. President Biden has called for a tax hike on wealthy Americans, by almost doubling the capital gains tax from 20% to 39.6%. While this proposal will face pushback from the opposition and Congress, many wealthy Americans already started exploring various tax strategies.
In high-tax states, for $1 million earners, rates on capital gains could be as high as 50%. It could be more in states like New York where the combined state and federal capital gains rate could be as high as 52.22%, and in California, it could be 56.7%.
Now comes the real question: “How exactly does this affect charitable giving?”. Charitable giving can be itemized for a deduction on tax returns. If you pay tax at a 20% rate, the cost of making a $1 donation is 80 cents as you are getting back your 20 cents when you itemize your charitable giving. Now, if your tax rate is increased to 40%, the cost of making a $1 donation becomes cheaper as you now get 40 cents when you itemize your donation. This makes charitable giving techniques more attractive.
While the current government eyes a tax rate as high as 43.4%, there could be implications on investments that could lead to more unemployment. In the coming months, we will see whether these proposals become reality. While none of these tax changes are unlikely to impact taxpayers in 2021, it is pertinent to understand what’s ahead and formulate strategies according to your needs.
