Proposed AMT: Wealth sustainability at risk for both HNW Donors & the Community

Most donors with higher net worth portfolios know that donating appreciated publicly traded securities, and other financial instruments such as mutual funds, segregated funds, and exchange traded funds, is a great way to amplify giving potential with tax savings.  It’s a triple win: a leveraged opportunity to  support community causes and a great tax and estate planning opportunity for the taxpayer and their survivors.  But there are tax clouds on the horizon.  Wealth managers, and in particular RWM™ (Real Wealth Manager) and MFA-P™ Designates are well positioned to help assemble a multi-stakeholder solution, but need to take action now.

Real Wealth Management™ charitable giving strategies may need to be reviewed.

The proposed January 1^st, 2024 changes to the alternative minimum tax (AMT) rules, are the trigger to revisit strategic charitable giving plans with their high-net-worth philanthropic clients to ensure the timing and the amount of gifts align with the tax changes.  It can make thousands of dollars of difference to the community.  

Although taxes should never be the primary driving in gifting strategies, it would be wrong not to consider the timing of substantial gifts given the tax increases – which may be avoidable -  on the horizon for these donors.   It depends on planned income levels, and the size of the gift.  It may also trigger a chance on who gives in the family – should this be the higher earner, or perhaps a lower earner who can avoid the AMT?

Specifically, when annual tax returns are filed, taxes are calculated based on legal and available tax credits and deductions used to calculate taxable income and taxes payable.  For high income earners, claiming specific tax “preferences” can lead to a second tax calculation – the AMT – which recalculates the liability without the use of otherwise allowable tax credits and deductions.  There is a basic exemption - $40,000 under the current rules and the figure that is the start of the fourth federal tax bracket, estimated to be $173,000 for 2024.

But beyond that there are significant nuances.  For example, under the new rules:

1. Capital gains will be recalculated with an income inclusion rate of 100% (currently 80%)
2. The inclusion rate for capital loss carryfowards and allowable business investment losses will be decreased to 50% (currently 80%)
3. The donation of publicly-traded securities will be included in income at 30% (currently these transactions are not subject to tax at all)

The scenario which produces the higher taxes – regular tax calculation or the AMT calculation - is then used to compute the taxes owing for the year.  In the case of the AMT there is a 7 year period in which the AMT can offset regular taxes payable in the future.  However, the key point is that HNW donors may find themselves being taxed on their in-kind securities donations and paying more taxes on their capital gains in general, which could affect their room for charitable giving after 2023.

Thus, the window of opportunity to guarantee a tax-free donation of appreciated securities is narrowing quickly as 2023 draws to a close, and RWMs must take this opportunity to be proactive. In particular, to  ensure that all stakeholders to a strategic giving strategy are informed of the upcoming changes is key.  It means, at a minimum, that year end tax planning discussions must be amplified, changed and then executed on earlier, rather than later to support the joint-decision making for efficient charitable giving. This may include your philanthropic client, their heirs, their executor(s), community foundation representative, financial planner, tax professional, portfolio manager, estate and insurance advisors and legal professionals.

Strategies could include:

• Staying the course with the existing charitable giving strategy, with awareness of the future potential tax implications, post 2023, for cash flow and tax planning purposes.
• Staying the course with the existing charitable giving strategy, but with a more definitive plan to manage the donor’s taxable income to avoid the AMT in 2024 and onwards.
• Income splitting or donation-splitting opportunities with a spouse – are those opportunities being maximized?
• Accelerating the gifting to and/or enhancing the amount of an in-kind securities donation, before 2024.
• Donating appreciated securities before year end to fund a single premium paid up life insurance policy in the name of the charity of choice.
• Donating appreciated securities before year end to establish or top up an existing donor advised fund.
• Considering a securities donation within one’s estate plan, since there is no AMT triggered by deemed dispositions at death, and donations of appreciated securities in kind via a will is not subject to AMT. In addition, there is a special tax rules that one is able to donate 100% of their net income in the year and year preceding death.

Bottom Line:  Don’t wait until Q4 to discuss year end tax planning with your clients.  With AMT on the horizon planning now is better.

Kristin Ramlal, B. Comm (Hons.), PFP, CIM, FCSI, RWM, MFA-P is Chair of the Society of Real Wealth Manager.  Evelyn Jacks is a best-selling tax author of 55 tax and personal finance books and President of national financial education institute, Knowledge Bureau.

Additional Educational Resources:  the RWM™ and MFA-P™ designation programs.

Prefer peer-to-peer learning – come to the September 20 CE Summit.