Increased Incentives to Give Appreciated Property

Gift planners have expressed a lot of excitement over the return of the charitable IRA rollover for 2013, and with good reason. There is another reason gift planners should be excited about fundraising in 2013: high income donors have substantially more incentive to donate appreciated assets, either outright or to fund a life income plan.

To start with, the top federal tax rate on most long term capital gain income has increased from 15% to 20% for taxpayers with taxable income above the following thresholds:

Married filing jointly and surviving spouses


Single taxpayers


Heads of households   


Put another way, the tax rate on long term capital gains is 1/3 larger than it was last year for donors in the highest federal tax bracket. For example, an appreciated property gift that avoided $12,000 in capital gain tax at a 15% rate will now avoid $16,000 at a 20% rate.

Appreciated Property
But there’s more to the story than that. Some donors must pay not only a 20% capital gains tax rate, but also to a new 3.8% surtax on net investment income, which includes realized capital gains.

Referred to by some as the Medicare surtax, this new tax went into effect on January 1, 2013 as part of the Affordable Care Act.  It is imposed on top of other income taxes and kicks in when a taxpayer’s modified adjusted gross income (MAGI) is above $250,000 for joint returns and surviving spouses, less than that for other filers. The surtax applies to the lesser of (1) net investment income or (2) the amount by which a taxpayer’s MAGI exceeds the applicable threshold. There is no charitable deduction against the surtax.

Example:  George and Ann McNeil are married filing jointly with $450,000 in wage income and $200,000 of long-term gain on the sale of $250,000 in appreciated stock that they purchased for $50,000. They will be in the 20% capital gains tax bracket. Since their MAGI is over $250,000, they are subject to the 3.8% surtax as well. The surtax effectively raises their marginal capital gains tax rate from 20% to 23.8%. They will pay $47,600 of tax on the sale of their stock, leaving only $202,400 to reinvest.

If the McNeils have a $250,000 major gift they want to make, they can avoid the $47,600 in tax by donating their appreciated stock rather than cash. Alternatively, if they are interested in life income in addition to making a gift, they could fund a charitable remainder unitrust (CRUT) with their stock. The unitrust can sell the appreciated property without paying any tax and reinvest the entire $250,000 for the future benefit of the charity and the McNeils.

The higher captal gains tax rates can apply even though the donor is not otherwise in the top income tax bracket.

Example: Bill and Susan Silver have wage income of $200,000 plus qualified dividends of $50,000 for a MAGI of $250,000. That puts them in the 28% bracket on wages and 15% on dividends. They also have an appreciated asset worth $1,000,000 with a cost basis of $100,000. If they were to sell that asset, the first $200,000 of gain would be taxed at 15%, the remaining $700,000 of gain would be taxed at 20%, and the entire $900,000 of gain would be subject to the 3.8% surtax. That’s a total tax of $204,200, leaving them with $795,800 to reinvest. Keeping the full $1,000,000 intact by establishing a CRUT with a 10% minimum reminder value to charity may look attractive to the Silvers.

State capital gains taxes also factor in. For donors in Massachusetts, the top 23.8% federal rate becomes a combined state and federal tax rate of 27.8%. In California, the top combined capital gains tax rate is 30.1%.

CRUTs were very popular in the 1990s, in no small part because the capital gains tax rate was 28%. For many donors with the wherewithal to fund a CRUT, taxes on capital gains have returned nearly to that level. We could see a surge in the popularity of CRUTs as a result.

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