Helping Advisors Cope with Tax Changes on the Horizon
Since President Obama released his controversial budget, advisors all over the country have been overwhelmed with calls about the proposed changes to upper-income taxes, charitable deductions, and estate taxes.
While it is not yet clear if Congress will vote these proposals into law, current economic challenges along with unprecedented government spending will undoubtedly feed an insatiable governmental appetite for more revenue. So we can be sure that big tax changes are on the horizon.
Let’s take a look at the three primary areas of proposed changes, as well as a fourth proposal regarding private foundations, and what it all means for you and your clients:
1) Tax Increases
The proposal includes a tax hike, increasing the highest marginal tax rate from 35% in 2010 to rates as high as 39.6% in 2011. Increased taxes on capital gain income could grow from 15% to 39.6% as well.
Gifts of appreciated assets prior to the sale would become even more attractive, allowing your clients to avoid more capital gains tax. Charitable remainder trusts and charitable gift annuities would become more prevalent as these vehicles are used to avoid capital gains tax upon the sale of an appreciated asset, while providing a continuing income stream to the giver.
2) Lower Limits on Charitable Deductions
It’s proposed that the benefit for taxpayers who make $250,000 or more be limited to 28%, beginning in 2011. So if one of your wealthy clients gets an extra $100 of income and donates it to charity in 2011, the extra $100 would be subject to a nearly 40% federal tax rate. But their charitable gift would only produce a $28 deduction. So they must spend nearly $12 in taxes to make the gift. Therefore, the “cost” of giving would go up.
There is strong bipartisan opposition to this proposal, and many observers do not believe it will pass. The bottom-line is you should look for opportunities to help your clients give income-producing assets so that income is removed from their individual tax returns and passed directly to charity.
3) The Estate Tax Freeze
In 2009, President Obama hopes to pass legislation that would freeze the estate tax exemption at its current level of $3.5 million and at its current rate of 45%, with no repeal of the estate tax which was scheduled to go away in 2010. Wiser estate planning with options for transferring wealth while still living will be essential for those with estate values beyond this exemption.
Efforts are underway by several groups to impose radical restrictions that could have a major impact on your clients who operate private foundations. The Greenlining Institute is lobbying for proposals that would require private foundations to make mandatory grants to certain “disadvantaged” groups, and require diversity in the sexual orientation of the foundation’s management and grant recipients.
The Alliance for Charitable Reform was established in 2005 to provide an emergency response to the greenlining effort (visit www.acreform.com to learn more). But overall, the result is that many private foundations are terminating in light of this new threat to philanthropic freedom.
So the real question is, what should you do? To help you plan in this challenging environment, read our post “Planning Checklist for Challenging Times“.