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Kim Laughton

Make Charitable Giving History in 2017

Why strong markets and possible tax reform may trigger the biggest giving year in U.S. history

by Kim Laughton—President, Schwab Charitable

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2017 may well be a record breaking year for philanthropy in the United States. Two significant contributing factors, strong markets and possible tax reform, suggest that now is an ideal time to embrace charitable giving, perhaps more than ever before. Giving now, rather than later in the year, could also be prudent given the potential for market volatility.

1. An improving economy and strong market performance have generated significant appreciation of investment assets, some of which can be donated to avoid or offset higher tax bills.

The S&P 500® stock market index has risen more than 60% in the last five years1 and commercial and residential real estate prices have reached all-time highs2. Because of healthy gains in investments, privately held business interests and real estate holdings, many investors may face higher tax bills this year. Donating appreciated assets or investments that have been held for more than one year to charity can help offset these taxes. Compared to selling the assets first and donating the cash proceeds, contributing appreciated assets or investments to a donor-advised fund or another public charity has a number of benefits:

  • When an asset or investment is donated to charity, the donor avoids paying capital gains tax on the sale of assets, which can increase their charitable giving as much as 20%, depending on the donor's tax bracket.
  • Donors can generally claim a charitable deduction for the full, fair market value of the donated securities up to 30% of adjusted gross income. Amounts in excess of 30% can be carried forward for as many as five years.
  • Amounts contributed to a donor-advised fund can be granted over time to the donor’s favorite charities.

Two hypothetical scenarios illustrate the potential for greater philanthropic impact and tax savings from donating $100,000 in appreciated investments that have been held for more than a year versus selling them and then granting the cash, after taxes, to charity.3 Scenario 2 allows donors to give up to 20% more to charity.

Scenario 1
Sell investments and
donate the proceeds
-$ 20,000 (long term capital gains tax)
$80,000 donated to charity
x39.6% (personal income tax rate)
$31,680 (personal income tax savings)
-$20,000 capital gains tax paid
= $11,680 personal income tax savings
Scenario 2
Donate appreciated
investments directly
-$ 0
(long term capital gains tax)
$100,000 donated to charity
x39.6%(personal income tax rate)
= $39,600 personal income tax savings
capital gains tax paid
= $39,600 personal income tax savings

2. Future tax reform legislation could reduce the tax benefits of charitable giving by lowering tax rates.

The value of charitable and other itemized deductions increased in 2013 when income tax and capital gains tax rates increased for most high income earners. The top marginal tax rate for high income earners is currently 39.6%and the top rate on capital gains and qualified dividends is 20%. Both the U.S. Congress and the White House have made tax reform a priority, and 70% of donors believe new tax rules are likely to take effect in 2018 or 2019.4 Although the itemized charitable deduction will likely be protected in some way, any reduction in income or capital gains tax rates could lower the value of charitable deductions. A recent analysis by the Indiana University Lilly Family School of Philanthropy found that charitable giving could decline by 4.6% as a result.5 To provide maximum support for their favorite causes, donors may prefer to increase their charitable giving this year to realize existing certain tax benefits. Donors may be particularly motivated to donate a portion of their appreciated assets or investments to charity if they have experienced a recent financial windfall, need to unlock wealth that is concentrated in non-cash assets, or want to reduce the size of their taxable estates.

Americans have an opportunity to make charitable giving history.

From 1976 through most of the 1990s, total giving was less than 2% of gross domestic product (GDP). At the end of the dotcom era, we saw an important change. Giving passed 2% of GDP and mostly stayed there. This is a positive milestone, but in the past twenty years, total charitable giving has not exceeded 2.1% of GDP.6 Each 0.1% of GDP currently represents more than $18 billion in additional charitable giving. That is more than all the annual donations to America’s top ten operating charities.7 Can Americans break through the 2.1% ceiling? We may find out in 2017.

Americans are consistently among the most generous people in the world, and the conditions are favorable in 2017 for donors who want to maximize the impact of their philanthropy. With potential tax reform looming and the possibility of market volatility, increasing your charitable giving could be a tax smart choice and help donors to maximize their impact on non-profits for years to come.