By Jennifer L. Franklin
Nov. 7, 2012
Even with the Presidential election now over, there remains nothing but uncertainty in the area of individual income tax planning.
Will the top marginal income tax rate for individuals rise from 35% to 39.6% next year? Will the top tax rate for long-term capital gains rise from 15% to 20% (plus an additional 3.8% with the expanded Medicare tax)? Will the top tax rate for dividends rise from 15% to 39.6% (again plus an additional 3.8% with the expanded Medicare tax)? That would all be the case if Congress takes no legislative action and, among other things, allows the Bush Administration tax cuts to automatically expire at the end of 2012.
In the area of the charitable contribution deduction, will the deduction be limited to 28% next year? That would be the case if the Obama Administration’s FY 2013 budget proposal for the charitable contribution deduction is enacted by Congress.
Given all of this uncertainty, the only certainty is that it makes more sense than ever to use a donor advised fund for 2012 year-end gifts, whether those gifts are of cash, appreciated property or investment income-generating property. First, you will be able to claim a charitable contribution deduction under the more favorable current tax rules, which have been in place for years and are not changing before the end of 2012. In addition, if you are accelerating income to 2012 to avoid possible significant increases in tax rates in 2013 and beyond, making a gift to a donor advised fund allows you to offset that increased income with a current charitable contribution deduction and use any excess deduction for five years to offset future income that may be subject to higher tax rates.
Furthermore, if you have appreciated or investment income-generating property (e.g., stocks or real property), you may wish to contribute that property to a donor advised fund in 2012, to avoid having the property become subject to higher tax rates in 2013, including the expanded Medicare tax and the possible significant increase in taxes on dividends. Therefore, given that no one knows what the future will bring (at least on the tax front), the time is right to use your donor advised fund for 2012 year-end giving.
*Jennifer Franklin is Counsel at Simpson Thacher & Bartlett LLP, where she advises a variety of international and domestic exempt organizations and their donors on tax and corporate issues. This posting was not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties under federal, state, or local tax law.