By Burt Hutchinson
What’s New — The Ever-Changing Tax Laws was the topic of a recent Delaware Tech-sponsored seminar. I was proud to participate alongside local estate attorney, Cindy Szabo. We’re both proud advocates for Delaware Technical Community College — the state's only community college — they do a great job of supporting their students and the community.
The virtual seminar was opened with a warm welcome from the college’s president, Dr. Mark Brainard. Del Tech has one of those missions that once you learn about, you want to be part of it, which has certainly been the case for me. I was introduced to the college by Cindy Szabo, to join their business advisory committee. Del Tech was looking for local professionals to provide them with advice about increasing their awareness in the community to help raise funds for the college’s mission.
Since I was new and naive, I suggested they simply raise their tuition. My reasoning was that they were by far the lowest cost college in the state. One of the longtime supporters of Del Tech, Dr. Bucky Owens, took the time to explain to me that it was the college's mission to be affordable to all. This is why their tuition was at the level it was. They knew if they raised their tuition by one more dollar it may mean somebody could not afford to attend. That was my “Aha moment”.
While it often seems a mission statement is written with the best of intentions, Delaware Tech lives out its mission each day as its students are truly at the center of everything they do. If you’re interested in listening to the seminar — you can scroll down to find the replay. Or for an overview, I’ve summarized some of the topics covered:
The Ever-Changing Tax Laws — Seminar Overview:
The talk focused on President Biden’s initial tax proposal along with the revisions that have since been seen from the Ways and Means Committee and their impact on individuals. We did not talk about any of the corporate tax changes. My focus was on changes to the tax laws, how charitable giving may or may not be affected, while Cindy shared insightful information from the estate planning side of the proposal. To wrap things up Cindy and I talked about ways to make tax-conscious charitable donations.
The talk took place on October 21, 2021. I am guessing that by time the actual law is signed or if one is even passed by Congress there will be more changes. It’s important to stay up to date on tax laws whether that be through your research, or as many choose to do, relying on a CPA. With that in mind, here’s an overview of what we discussed.
What’s Coming In Terms of Tax Law Changes
The good news, as the bill currently stands, is there’s nothing significant that would affect charitable giving. Qualified charitable distributions, gifting of securities, cash, and even the more complex tools such as charitable remainder trusts are still options. Under the current proposal, we’re able to give as we have in the past.
But what about income taxes? The current changes affect high-income earners with taxable income over $450,000 (married filing joint) or $400,000 (single filer). These taxpayers will see their top ordinary tax rates increase to 39.6%. For some this is a 4.6% increase compared to their current tax rate since today they are paying 35%.
These taxpayers will also see an increase in their capital gain tax rates. The current proposal increases the top capital gain rate from 20% to 25%. The good news is that for taxpayers who are in the 10% and 12% marginal tax bracket their capital gain rate stays at zero. Taxpayers who are in the 22% and 24% marginal tax bracket will continue to pay 15% on capital gains.
The proposal calls for these tax rates to be retroactive to September 13, 2021. This means if you sold stock in October, you would have to pay a higher tax rate than you anticipated. With tax rates increasing it may be a good time to consider charitable gifts to lower your tax bill.
As for the estate planning side, the current exemption amount is $11.7 million for a single taxpayer. For a married couple, that comes to a combined exemption of $23.4 million. Under the new proposal, these amounts would be almost cut in half to $6 million for a single taxpayer and $12 million for a married couple. This means if all your assets add up to an amount greater than $6 million at death you could be subject to the federal estate tax. These assets include things like life insurance that you are the owner of, your home as well as your investment accounts.
One positive on the estate planning side is they did not eliminate “Portability”. Portability allows a surviving spouse to use any unused estate and gift tax exemption of their deceased spouse. Be aware, to utilize portability you have to file an estate tax return for your previously deceased spouse even if their estate would not be subject to the estate tax. This is a very complicated area of tax law and you should work with competent professionals.
One alarming change that has since been taken out of the bill was the elimination of the step up in cost basis at death. This can be confusing so Cindy shared the following example:
If you purchase a property, for example a vacation home, for $250,000, that is your cost basis. If the property appreciates to $500,000, and you sell it, you would pay capital gains tax on the amount the property appreciated, in this case, $250,000. If you were to pass away and the property was valued at $500,000 at the time of your passing, the cost basis for the person who inherited the property would be $500,000. This is the step up. Your cost basis is “stepping up”.
If the beneficiary turned around and sold the property for $500,000, they would pay $0 in capital gains taxes. If they held onto the property and it appreciated to $600k before selling, they would only owe capital gains taxes on the $100,000 increase from when they inherited the property. This is beneficial to beneficiaries who inherit properties that have increased in value.
Ways to Gift and Make Charitable Donations
As previously noted, the way we give is not expected to be impacted by the new tax proposal. However, there are more tax efficient ways to give than others and what assets you give is really important. Remember charities do not pay taxes. ALWAYS give the charity the most tax inefficient assets, such as taxable IRAs. Learning how to give gifts in the form of charitable donations is a topic of its own that we had a chance to dive into.
One Great Way to Give to Charities Is by a Qualified Charitable Distribution (QCD)
A QCD is a direct transfer from your IRA to a qualified charity. In doing so:
The distribution doesn’t hit your adjusted gross income
This may help you avoid higher Medicare premiums or hitting other “phaseouts” by reducing your modified adjusted gross income
You can realize a tax benefit without itemizing
You have to be 70 1/2 in order to do a QCD. Each taxpayer is allowed to gift up to $100,000 from their IRA in a QCD each year. That means if you are married and each of you are over the age of 70 1/2 you can gift $200,000. While there are caps on QCD’s, there is on minimum amount or limitations on the number of charities you can support.
We have had clients give $25 to multiple charities in a given year. You should always work with an advisor to ensure you follow the correct tax law procedures and ensure the gift you wish to make will not adversely impact your finances.
From there we talked about outright gifts like cash, the benefits of donating appreciated property, and gifting through a trust. The benefits of charitable donations are often twofold — when you turn money that would otherwise be paid in taxes into charitable donations — it’s a win-win in our book.
We help our clients navigate these sorts of transactions to assure tax law compliance and minimize their overall tax bill while supporting the charities of their choice. If these scenarios sound fitting for you, feel free to reach out to me directly, I’d be happy to help you navigate your charitable donations.
Catch the Replay
This overview skims over what we covered, for all the details you can watch the replay for a limited time. We want to send a special thanks to Delaware Tech for hosting these informative seminars. If you have any interest at all in supporting their initiatives, I encourage you to check out the Giving section of their website.
Keeping Tax Strategy At the Forefront of Financial Planning
If you’re interested in making a large charitable donation while ensuring you’re making the best money moves in terms of reducing your lifetime tax bill, reach out to me or my team here at Integrated Wealth Management to set up a complimentary meeting.
As Wealth Advisors and CPAs, we create financial plans with your personal philanthropic and retirement goals, and tax consideration is at the forefront of every recommendation we make.
We take a tax-focused approach to wealth management because taxes are what often eat at the pockets of high-income earners.
By utilizing tax mitigation strategies over your whole personal financial portfolio, you end up giving and saving more. It's not only smart, it’s a win-win for you, the organization you have in mind, and oftentimes for your family when planning to leave a legacy for future generations.
As the end of the year approaches, it’s the perfect time to assess charitable giving opportunities. We’re here to assist.
About Burt
Burt Hutchinson started his working life as a lineman for Delmarva Power, but an investing book changed the course of his career. He realized sound financial advice can give people the confidence and security to enjoy their lives to the fullest, including retirement. He wanted to use his growing expertise to help others.
Today, as a CPA and CERTIFIED FINANCIAL PLANNER™ (CFP®) professional, Burt is honored to guide couples and individuals through the three stages of retirement, from uncertainty, to stability, to reflection.
After earning his CPA certification, Burt worked for one of the “Big Four” accounting firms—PricewaterhouseCoopers. But he soon realized he wanted to make a more personal impact by working with people rather than corporations. This realization led him to start Integrated Wealth Management.
Burt and his wife Kimi are residents of Lewes and have one daughter. They take pride in their community and enjoy supporting local charities focused on children and education. Outside of the office, he and Kimi enjoy golfing and hitting the gym. As a family, they enjoy traveling and being foodies. Learn more about Integrated Wealth Management and our team.