New tax law may affect charitable giving
Of all the reasons why a new state tax code may not affect giving as much as some think it will, Thomas Ahrens points out something about the wealthy: They have hearts too.
Yes, it’s easy to be cynical about wealthy people, especially with President Biden talking about the need to tax billionaires while Jeff Bezos plans to build a private space station. But really, wealthy people don’t give just to receive a deduction, Ahrens said. Ahrens, by the way, is a tax partner at Eide Bailly LLP, a Fort Collins accounting firm. He’s not, in other words, a charity head, so he has no real reason to say that.
“If they are giving $100,000,” Ahrens said, “it’s really about the charity.”
SPONSORED CONTENT
Select your Republic Services residential cart now!
In preparation for Republic Services becoming the primary provider of residential recycling, yard trimmings, and trash, residents should now select the best cart size and service schedule for their household needs.
Even so, the state law, which goes into effect next year, may affect giving, or at least change their plans this year, Ahrens said. The law limits deductions wealthy taxpayers take on charitable giving. Those who make a gross income of $400,000 or more will have deduction limits at $30,000 for single filers and $60,000 for joint filers starting in 2022.
If you haven’t heard of the law, signed on June 23, don’t kick yourself: Some foundations and organizations didn’t either, even the larger ones.
“I think it caught a lot of people by surprise,” said Rand Morgan, president of the Weld Community Foundation.
Ahrens said many of his clients don’t know about it either.
“I do think it’s a conversation we will have with our clients,” he said. “Whether it makes them give now or later, we will see.”
That’s the question many are asking of their clients, whether it’s foundations or tax accountants, because one way to dodge a new tax law is, of course, to get your business done before it goes into effect. In this case, that could mean individuals giving more this year to make up for the hit they will take next year.
That could save givers thousands of dollars, said Ella Fahrlander, the chief engagement officer at Community Foundation of Northern Colorado, and this is a big reason why the foundation has sent out a flurry of notices about the new law.
“Heart comes first,” Fahrlander said, “but the tax benefits are important. We need to give donors a solution.”
Donor-advised funds give taxpayers another option, according to foundations that may see more of them by the end of this year. The funds give taxpayers the entire deductible amount now, but donors can control the money over time. It’s possible to give, say, $500,000 to a pet shelter and receive that uncapped deduction this year but have the fund give $50,000 a year for 10 years.
“That’s the most popular giving tool in the U.S.” Fahrlander said of donor-advised funds.
The federal CARES Act, meant to stimulate giving and the economy as well as keep places afloat during the pandemic, gave 100% deductions to cash donations, which also dries up this year. Morgan believes that will affect giving more than the new state tax law.
Some, including Morgan, don’t believe this will affect giving much at all, as the federal income tax rate of 35-37% for wealthy individuals far outweighs any concern about the state’s 4.63% rate. President Biden has expressed support for limiting federal deductions in the same way as Colorado did, but so far nothing’s come of it, even as Biden searched for ways to pay for his new social net programs.
Studies show that tax benefits do matter, but as foundation officials have said, they aren’t the main reason for giving. The U.S. Trust Study of High Net Worth Philanthropy found that tax benefits ranked 10th, far behind belief in an organization’s mission, when asked about what is important when making charitable contributions.
Kristin Todd, president of the Community Foundation of Northern Colorado and a former executive of the Daniels Fund, acknowledged that the tax benefit is a “big part” of the reason people give.
“But we see that heart,” Todd said. “They want to be good to communities that are good to them.”
