Last week, President Joe Biden issued his budget request for the 2023 fiscal year, outlining his tax and spending agenda for the coming year. The Treasury Department was with the budget proposal green book, which puts some meat on the bones of the tax provisions included in the request. This year, there are a number of proposals that could impact donors and their charitable donations.
Private foundations and donor-advised funds
Under the current law, private foundations (PFs) are required to give at least 5% of their assets to public charities every year in exchange for their tax-exempt status and preferential treatment. There are exceptions, such as a separate rule for long-term projects, but in general we see PFs consistently meeting or exceeding this payment requirement.
Sometimes, PFs make grants to Donor-Aided Funds (DAFs) to collaborate with other funders, use the knowledge of community foundations of local grantees or even PF and its They also do it for the safety of the employees. And right now, those grants to DAF count into that 5% payment because all DAF sponsoring organizations are considered public donations.
A provision in the President’s budget request would significantly limit PF’s ability to use DAF and still meet their payment requirement. If enacted, it would only allow PFs to count DAF grants for their 5% payment if they owe money from DAF by the end of the next tax year and keep a clear record of the transaction.
Unfortunately, this can lead to changes in grant-making that are not all positive. If PFs are discouraged from using DAFs, we may see less collaboration, less informed grants and hasty projects. While it is absolutely necessary to ensure that PF assets meet payout requirements, it would be prudent for the White House and lawmakers to ensure that if this change goes ahead there are unintended consequences for certain types of projects.
taxing the rich
Unsurprisingly, Biden’s budget request included a number of changes that would increase taxes on wealthy taxpayers and, as a result, how much money they would have to give to charity and the cost of that charitable gift:
- raising the top personal income rate from 3% to 39.6%;
- Creating a minimum income tax of 20% for households with assets in excess of $100 million to take advantage of income and unrealized capital gains;
- eliminating the step-up basis on death for capital gains in excess of $5 million; And
- Taxing long-term capital gains at the top personal income rate for taxpayers with taxable income of more than $1 million.
All of these changes stand to affect the amount, timing and type of donations that will be given to wealthy donors.
On the one hand, the above tax increases technically reduce the “cost” of giving to charity. For example, under current law at the top personal tax rate with charitable deductions, a gift costs 63 cents in after-tax income for every dollar that goes to charity. If the top rate increases, it will cost about 60 cents for every dollar that goes to charity.
On the other hand, higher taxes mean that donors have less money in their pockets to give, which incentivizes charities and makes the flexibility of giving vehicles even more important to encourage more giving. . Of course, we know that donors give because they are generous, but how much, when, and to which organizations they give.
looking ahead
Biden’s budget request is a tool to outline his tax and spending priorities for the year, and it will take a lot of work to get one of these provisions enacted into law. Prominent liberal parliamentarians, such as Sen. Joe Manchin (D-WV) has already sprayed cold water on a proposal to tax unrealized capital gains, so there isn’t much hope of it going to the upper house. However, this budget gives an indication of what the president and the Democratic Party may focus on next year. And with the election approaching, lawmakers will want to push proposals to show their voters that they can get the job done in Washington. Let’s hope those who can afford charitable donations stay out of reach.
