Legislative Impact on Charitable Giving - Fidelity Charitable

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Legislative Impact on Charitable Giving

How The American Taxpayer Relief Act of 2012 can influence your charitable plan

What’s different about this year? Every year, it’s important to review your charitable giving strategies as part of your overall financial, tax, and estate planning. This year, and going forward, The American Taxpayer Relief Act of 2012 adds some new considerations. On January 3, 2013, President Obama signed The American Taxpayer Relief Act of 2012 (the Act) to avert major portions of the “fiscal cliff” from going into effect. As you determine your charitable approach this year, consider key provisions within the Act that may impact or inform your giving, including1: 1. An increase in the top tax rate on capital gains and qualified dividends for high earners 2. The reinstatement of limitations on itemized deductions 3. Expanded options for Roth conversions 4. An increase in estate tax rates and limitations

THE AMERICAN TAXPAYER RELIEF ACT OF 2012 The American Taxpayer Relief Act of 2012 is expected to modestly increase giving relative to 2012 (an estimated 1.3%), mainly due to the increase in the top marginal tax rate.* * Urban Institute Analysis, Tax Policy and Charities, January 2013.

This article will cover these provisions in greater detail, examine the charitable impact of these changes, and explore four philanthropic approaches to consider this year.

What’s inside DONATING APPRECIATED SECURITIES INCLUDING COMPLEX ASSETS

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UNDERSTANDING ITEMIZED DEDUCTION LIMITATIONS

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OFFSETTING THE COST OF A ROTH CONVERSION

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INCORPORATING CHARITABLE PLANNING INTO YOUR ESTATE PLAN

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The Act also included a provision that allows a two-year retroactive IRA Charitable Rollover extension (for 2012 and 2013), which had previously expired on December 31, 2011. The new law, which continues to exclude donor-advised funds, supporting organizations, and private foundations as eligible charitable recipients of a tax‐free IRA distribution, retroactively reinstates the IRA Charitable Rollover for 2012 and allows any otherwise eligible gifts made after December 31, 2012, and before February 1, 2013, to be treated as a 2012 donation. In addition, the new law specifies that any portion of a distribution from an IRA to a taxpayer which was contributed to charity and made after November 30, 2012, but before January 1, 2013, may be treated as a qualified charitable distribution for purposes of the IRA Charitable Rollover. The IRA Charitable Rollover has also been reinstated for 2013 and will expire on December 31, 2013. 1

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1 DONATING APPRECIATED SECURITIES AND COMPLEX ASSETS MAY NOW BE MORE VALUABLE The Act increases the top tax rate on capital gains and qualified dividends from 15% to 20% (for individuals with taxable income above $400,000 and $450,000 for couples filing jointly). In addition, a new 3.8% Medicare tax for higher-income taxpayers is in effect. This tax generally applies to the portion of a taxpayers’ net investment income that exceeds a modified adjusted gross income of $200,000 for individuals and $250,000 for couples filing jointly.

A POSSIBLE SOLUTION FOR UNKNOWN-BASIS STOCKS Donating long-term appreciated stocks or mutual funds with an unknown or hard-to-find cost basis may eliminate your need to research the basis and may allow you to take a tax deduction for the security’s fair market value.

This means some taxpayers will pay a 23.8% tax on capital gains and qualified dividends.

23.8%

Charitable impact: Directly donating long-term appreciated securities to charity, including complex assets, may now even further increase the impact of a charitable gift. In most cases AMOUNT SOME when such assets are donated directly to a charity, the donor is not required to pay capital TAXPAYERS gains taxes or the Medicare tax. WILL PAY ON CAPITAL However, in any tax year donating long-term appreciated securities to charity (rather than GAINS AND selling the securities first and then donating the after-tax proceeds), can have multiple benefits: DIVIDENDS 1. You owe no taxes on the capital gains, so the charities to which you donate receive a larger donation. 2. You may be eligible to take an income tax charitable deduction for the full fair market value of the donated securities, up to a maximum of 30% of your adjusted gross income (AGI) for contributions to public charities. (Any amounts in excess of the 30% limit can be carried forward for up to five years.)

Legislative Impact on Charitable Giving 3

Steps you might take now While you can donate long-term appreciated stock or mutual fund shares directly to any 501(c)(3) charity, donating to a charity that sponsors a donor-advised fund program has an added advantage: You are generally eligible for all of the immediate tax benefits associated with your donation, plus you

gain the flexibility to support many charitable causes over time with one contribution. Additionally, the administrative burden many smaller charities face when asked to receive and liquidate shares of a security is removed.

The example below shows the potential benefit of this giving strategy at a 20% capital gains rate, coupled with the 3.8% Medicare surtax.

Benefits of Donating Appreciated Securities

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When you contribute long-term appreciated shares instead of selling the securities and contributing the cash sales proceeds, you can potentially eliminate capital gains and the Medicare surtax, give more to charity and save more in taxes.

CAPITAL GAINS AND MEDICARE SURTAX PAID2 (23.8%)

NET CHARITABLE DONATION 3 $

42,860 $

($7,140)

SCENARIO 1

INCOME TAXES SAVED2

Donate Cash Proceeds

9,833

50,000

$

50,000 FAIR MARKET VALUE

$

19,800

$

0

$

SCENARIO 2

Donate Securities Directly Assumes cost basis of $20,000, in tax savings and long-term capital gains of $30,000

$

7,140 more for charity

Double the tax savings

This is a hypothetical example for illustrative purposes. Chart assumptions: Donor is in the 39.6% federal income bracket with an AGI of $500,000. State and local taxes, the federal alternative minimum-tax 2 Assumes all realized gains are subject to the maximum federal long-term capital gain

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1 and limitations to itemized deductions applicable to taxpayers in higher-income brackets are not taken into account.

This is ofa 20% hypothetical example illustrative purposes. Chart Donor is in the 39.6% federal income bracket an on AGI of $500,000. and local 3 Availability of certain federal income tax deductions maywith depend whether you itemize State deductions. tax rate and the Medicare surtax for of 3.8%. Does not take into account stateassumptions: or local taxes, if any. taxes, thecontributions federal alternative minimum-tax and limitations toare itemized deductions to taxpayers in higher-income are notare taken into account. Charitable of capital gain property held for more than one year usually deductible at fair applicable market value. Deductions for capital gain property heldbrackets for one year or less usually limited to 2 cost basis. Please consult your tax advisor regarding your specific legal and tax situation. Information herein is not legal or tax advice. Assumes all realized gains are subject to the maximum federal long-term capital gain tax rate of 20% and the Medicare surtax of 3.8%. Does not take into account state or local taxes, if any. 3Availability of certain federal income tax deductions may depend on whether you itemize deductions. Charitable contributions of capital gain property held for more than one year are usually deductible at fair market value. Deductions for capital gain property held for one year or less are usually limited to c ost basis. Please consult your tax advisor regarding your specific legal and tax situation. Information herein is not legal or tax advice.


2 CERTAIN DONORS ARE SUBJECT TO A “HAIRCUT” ON THEIR 2013 ITEMIZED DEDUCTIONS, INCLUDING CHARITABLE CONTRIBUTIONS The Act permanently reinstates an overall limit in itemized deductions (known as the Pease limitation) for taxpayers with AGI above $250,000 (individuals) and $300,000 (couples filing jointly). In brief, the Pease limitation reduces itemized deductions, including those to charity, by 3% of the amount by which a taxpayer’s AGI exceeds the threshold.2

UP TO

50%

Charitable impact: Often referred to as a “haircut”, the Pease limitation reduces the overall value of impacted taxpayers’ itemized deductions, including charitable contribution deductions.

The charitable deduction allows donors to deduct up to 50% of their AGI for cash contributions and up to 30% for contributions of long-term appreciated securities—assuming the charitable AMOUNT OF AGI contributions are made to a qualified public charity. THE CHARITABLE DEDUCTION ALLOWS DONORS Steps you might take now TO DEDUCT FOR 1. Take a thoughtful approach 2. Consult your legal or tax CASH DONATIONS to charitable planning as you advisor for guidance on your TO CHARITY determine how to support your specific tax situation. favorite charities most effectively.

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But not to exceed 80% of the value of the taxpayers’ total itemized deductions.


3 INCREASED CHARITABLE DONATIONS MAY HELP OFFSET THE TAXABLE INCOME RESULTING FROM A ROTH CONVERSION The Act expands the types of accounts eligible for a Roth conversion to include a 401(k), 403(b), or 457(b) account. Charitable impact: Making a charitable contribution may be one way to offset the potentially increased income tax incurred from the conversion of a traditional individual retirement account (IRA) to a Roth account.

Steps you might take now If you plan to accelerate income or convert to a Roth account, consider increasing your planned charitable contributions in the year in which you incur the additional income. The extra tax deduction from your donations may help offset the increase in your taxable income.

In addition, if the charitable donation is made to a public charity that sponsors a donor-advised fund program, you’ll be able to use the proceeds from a single donation to support multiple causes this year and into the future.

The Charitable Offset Strategy* Hypothetical example: Makingmay a qualified reduce the tax cost of this Roth conversion by $39,600 A charitable donation helpcharitable reducecontribution tax cost ofmay conversion $600,000 $500,000 $400,000

Roth account

Roth account

$500,000

$500,000 Out of Pocket

$300,000 $200,000

$264,446

$100,000

Paying for a conversion with no charitable deduction

to IRS

Out of Pocket $100,000

to charity

$224,846

to IRS

Paying for a conversion with a charitable deduction

Hypothetical tax amounts assumed a married couple filing jointly, 2013 federal ordinary income tax rates, $300,000 of taxable income, $500,000 Roth conversion amount and a $100,000 fully deductible charitable contribution. Taxes would have been $75,313 with no conversion and no charitable contribution. The overall limitation on itemized deductions, other limitations, the federal alternative minimum tax, and state and local taxes are not taken into account. *This is a simplified hypothetical example for illustrative purposes only. Tax results can vary greatly depending on an individual’s unique tax situation. Other strategies may provide more flexibility and similar savings, including utilizing other deductions and/or converting your assets to a Roth account over several years. Please consult with your tax advisor.


4 INCORPORATING CHARITABLE PLANNING INTO YOUR ESTATE PLAN The Act modified the estate exemption amount to $5.25M (from $5.12M) and increased the highest taxable rate from 35% to 40%. Charitable impact: If a portion of your estate is likely to be taxable, you may want to consider incorporating charitable giving into your estate plan, if you haven’t done so already.

40%

A DONOR-ADVISED SOLUTION ADDS FLEXIBILITY Donor-advised funds (DAFs), such as the Fidelity Charitable® Giving Account®, may make it easier to give more efficiently and effectively. If you make a charitable contribution to fund a DAF in 2013, you will generally be eligible for the 2013 tax benefit—based on today’s tax rates and deduction limits. You then have the flexibility to recommend grants to various charities now and in the future.

Building flexibility into your estate plan by creating charitable trusts may help you respond to estate tax changes while you honor your HIGHEST TAXABLE commitment to favorite charities. You may create RATE ON ESTATES a Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT) during your lifetime or through your will. There are no limitations on the total amount you may donate from your estate to these trusts, and the assets you transfer to charity are not taxed.

Steps you might take now One way to build flexibility into your estate plan is to name a donor-advised fund (DAF) as one of the beneficiaries for your charitable trusts.

1. Change the charities you support from year to year without needing an attorney to revise trust language

Naming a DAF as the beneficiary of a charitable trust gives you and your heirs the ability to:

3. Give family members advisory privileges over the DAF in order to further your charitable legacy for generations to come

2. Vary the amounts you donate each year


LEARN MORE Visit FidelityCharitable.org to: • Explore the benefits of using a donor-advised fund for your charitable giving • U se the Charitable Calculator to explore how giving appreciated securities and other donations may benefit your income taxes • S ee how a charitable donation may minimize the tax impact of a Roth conversion • Learn more about adding flexibility to your estate plan

CONTACT US Visit FidelityCharitable.org or call 800.682.4438 to explore the solutions available to you.

Information provided is general and educational in nature, and should not be construed as legal or tax advice. Fidelity Charitable does not provide legal or tax advice. Content provided relates to taxation at the federal level only, and availability of certain federal income tax deductions may depend on whether you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy or completeness of the information provided. Charitable contributions of capital gain property held for more than one year are usually deductible at fair market value. Deductions for capital gain property held for one year or less are usually limited to cost basis. Consult an attorney or tax advisor regarding your specific legal or tax situation. Fidelity Charitable is the brand name for Fidelity® Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide services to Fidelity Charitable. The Fidelity Charitable name and logo, and Fidelity are registered service marks, of FMR LLC, used by Fidelity Charitable under license. Giving Account is a registered service mark of the Trustees of Fidelity Charitable. 644938.1.0

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