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Jack Owen’s Tax-Exempt Alert JULY 2021

An important U.S. Supreme Court case was decided on July 1, 2021, Americans for Prosperity Foundation v. Bonta, involving California’s requirement that organizations making charitable solicitations file Schedule B to IRS Form 990, providing unredacted information on substantial contributors. The Court reversed an appeals court ruling in favor of California and finding that California’s requirement to report donations of major contributors to be unconstitutional.

At this time, charities should be aware of potential developments that may affect their donors and themselves. On April 28, 2021, the White House released their American Families Plan (“AFP”) proposal. The AFP calls for spending $1.8 trillion to provide subsidized childcare, free education (pre-K and community college), and paid family and medical leave, among other things. The President plans on paying for this new spending by increasing taxes on taxpayers earning more than $400,000, an increase in capital gains tax rates for people earning more than $1 million, and eliminating the “stepped up basis” rules for gains in the value of inherited property above $1 million, among other things. Despite earlier reports from the Biden Administration, the AFP does not limit the value of itemized deductions to 28 percent.

I will list, in no particular order, other potential Biden Administration tax / estate tax priorities which have been discussed as possibilities (these must of course be passed by Congress before becoming law):

  • A wealth tax that taxes dividends and capital gains at ordinary income tax rates, and requires certain taxpayers to pay an annual tax on net unrealized gains (gains would not just be taxed upon sale of an asset).
  • Reduce the federal gift and estate tax exemption from $11.7 million to a much lower figure, perhaps $3.5 or $5 million.
  • Federal estate tax rates might be increased on a graduated scale from 40% to as much as 77% on large estates.
  • Eliminate / limit certain discounting techniques such as discounts for a minority interest and lack of marketability. Also discounting techniques such as grantor retained annuity trusts (“GRATs”), charitable lead trusts (“CLTs”) and charitable remainder trusts (“CRTs”) could be limited.
  • Limit the generation skipping exemption to a specific term of years, maybe 50 – 90 years, with tax payable at the end of such term.
  • Reduce the current annual exclusion from the gift tax from $15,000 per donee to as little as $20,000 – $50,000 by capping the total for all donees.
  • Capping the benefit of itemized tax deductions (28% benefit only), and the elimination of up to 80% of the deductions of upper income taxpayers (restore PEASE limits for income over $400,000).
  • Broaden the 12.4% Social Security tax (currently imposed on compensation up to $142,800) to include income in excess of $400,000.
  • Limit the size of IRAs or other retirement accounts, with penalties assessed on amounts exceeding the limits.

Donors and their tax advisors may be wise to take action before these changes can be implemented. These changes may limit tax benefits available to taxpayers in future years causing them to increase tax deductible charitable giving in 2021.

Two other developments to consider:

  • The Legacy IRA Act, currently in Senate Bill 243, proposes to allow life income gifts to be funded by IRA Charitable Rollovers (an expansion of current law). The 70.5 age requirement would be lowered to 65 for life income gifts. We have contacted our Congressional representatives to support this expansion of the IRA Charitable Rollover.
  • In a recent case, the PA Commonwealth Court said Allentown, PA could not impose its business privilege tax on a local charity.

Please do not hesitate to contact us if you have any questions on these subjects or other matters related to your charitable organization.

We sincerely hope you appreciate receiving the information in this newsletter. But in case you do not want to receive it, please contact Diane Trichtinger at 412.745-1040, or [email protected] to be removed from this list. Likewise, please contact Diane with any colleagues or other persons who you would like to add to this list.

Note: This provides general information regarding matters of interest to tax-exempt organizations. Such information is neither legal advice nor legal opinion concerning particular situations. If legal advice or opinion is required, legal counsel should be consulted.

We would be pleased to address any questions you may have regarding the foregoing or any other tax-exempt issues. For further information, please contact Mike Dutkovich (412-765-0535), [email protected]; Susan Ott (412-745-9900), [email protected]; or Jack Owen (412-765-1020), [email protected]

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    Pittsburgh, Pennsylvania 15219
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