May 03, 2013
By Jeffrey K. Gonya, partner-in-charge of Venable’s Tax and Wealth Planning Practice
Recent changes in tax laws make charitable deductions more appealing—and careful planning more important—than ever.
Tax changes for all
As a result of recent legislation, all U.S. taxpayers face major tax changes for calendar year 2013 and beyond. Major media coverage has trumpeted increases in the top marginal tax rate on ordinary income and the top rate on capital gains and dividends. Less attention has been given to a new 3.8% Medicare surtax on the “net investment income"—dividends, interest, rents, royalties and capital gains—of higher income taxpayers. These additional taxes apply not only to individuals, but also to estates and trusts with $11,950 of taxable income.
These tax increases make charitable deductions even more valuable than in the past, even though Congress also re-imposed limitations on a broad array of deductions including charitable deductions.
Estate and gift tax law changes
The recent Tax Act also made permanent changes in the estate and gift tax laws. The threshold for taxable estates has been raised permanently to $5 million (indexed for inflation), but estates above $5 million will be taxed at 40% as opposed to the 2012 rate of 35%. Maryland residents face an additional estate tax on amounts over $1 million, with an effective rate typically between 6% and 10%.
Wondering how to maximize your estate and your philanthropy given these new provisions? IRAs and 401(k)s have always been the best assets to direct to a charitable beneficiary, which will receive 100% of their value. An individual beneficiary in the highest income tax bracket may receive as little as 25%-30% of the pre-tax value, because retirement assets may be subject to both estate and income tax.
Naming a charity as beneficiary of your IRA or 401(k), or making a direct “charitable rollover” contribution from your IRA (a special provision for those 70 ½ and older), gives you the satisfaction of benefitting your favorite charity without significantly diminishing the amount of wealth that your heirs would otherwise receive.
Planning for today and tomorrow
As always, consult your legal and financial advisors for specific guidance. If you are charitably inclined, consider including BCF on your advisory team, to add the element of philanthropic expertise to your financial and estate planning.
Jeff Gonya is partner-in-charge of Venable’s Tax and Wealth Planning Practice, and a member of BCF’s Professional Advisor Recognition Society.