The looming of the “fiscal cliff,” a combination of tax increases and spending cuts, scheduled to go into effect in January 2013, also brings lots of uncertainty for the local financial and tax advisers of San Diego’s wealthiest residents.
The advisers’ advice, meanwhile, could also be critical for the financial health of local nonprofit organizations, which benefit from the rich making large donations to promote public good.
Their concern is that with President Obama’s proposed limit of the charitable contribution deduction to 28 percent from the current 35 percent for single taxpayers earning more than $200,000 and married couples filing a joint return with income above $250,000, the rich will be less inclined to give.
But that too remains to be determined by Congress.
Three local advisers to San Diego’s top earners who have an annual income of $400,000 or higher, offer some insight on how income-tax rates, capital gains and estate taxes, among other provisions, could affect charitable contributions this year and for years to come.
Will Beamer, partner and chief investment officer at the financial advisory firm, Dowling & Yahnke LLC in Carmel Valley, whose clients own at least $1 million in financial assets, said while his clients likely will need to pay more in federal and state taxes in 2013 and beyond, it won’t be the determining factor for gift-giving.
Concern Is Financial Security
“As the law stands, the Bush tax cuts will expire on Jan. 1, 2013 — if Congress does nothing, the top income bracket would be raised from 35 percent to 39.6 percent — but the last thing I will advise my clients on is what Congress may or may not be talking about,” Beamer said. He added, “While we enjoy helping people with their charitable giving, our primary concern is their own personal financial security.”
Sid Tobiason and Bruce Knowlton, tax partners at accounting firm Moss Adams LLP in San Diego, who advise owners of closely held businesses and wealthy individuals, said when it comes to charitable contributions, a lot of factors come into play.
“Our clients’ decision on whether to make a charitable contribution from one year to another is more based on their economic situation, or how the economy has impacted them, more so than what the tax rate is,” Tobiason said.
Knowlton noted that with the passage of Proposition 30 in California — which raises the state sales tax by a quarter-cent for four years and income tax rates for individuals who earn more than $250,000 a year for seven years — high income earners will see a 3 percent hike in state taxes from 10.3 percent to 13.3 percent.
The sales tax increase will be effective in Jan. 1, 2013, but the income tax increase is effective starting with the 2012 tax year.
“If there is a danger of people losing a deduction, you want to go for the sure thing,” Knowlton said. “Going forward with the higher federal (and state) tax rate for the highest income earners, and if nothing is done to the charity deduction, they would be worth more next year.”
There Are Options
Tim Callan, president and co-founder of the investment advisory group Callan Capital in San Diego, who manages assets of $2 million for new clients, projected that some of his clients may be less inclined to donate, if tax rates go up and the limit on charitable contributions takes effect.
He noted, however, that for donors who want to use this year’s charitable tax benefits, there are options.
“A lot of our clients want to donate, but they don’t know to which charity,” Callan said. “It’s good to put the mechanisms in place, so we can pull the trigger in December — hopefully, Congress will give us the budget next month.”
Two options for putting mechanisms in place, according to Callan, are the “donor-advised funds” and “family-foundation.”
Donor-advised funds offer givers the ability to make large contributions before year-end and get a full deduction, while allowing them to postpone decisions about recipients. Family foundations provide grants to charitable organizations and causes who adhere to the wishes of the donors. It requires that donors disburse a minimum of 5 percent of their endowment income annually.
Family Foundation More Flexible
Comparing the two, Callan said that a family foundation allows more flexibility on the type of charity someone wants to support and allows a family member to be on the board of directors and take a salary. Whereas a donor-advised fund typically goes to an existing charity, is easier to set up and private.
Beamer said he would also consider recommending setting up a donor-advised fund to clients who want to give money into the future.
“It could be appropriate for someone who has an unusually high income this year,” Beamer said. As someone who works with nonprofit organizations, Beamer said the sector will fight any changes which would discourage giving.
“There will be enormous lobbying against that from the entire charitable industry,” Beamer said. Callan agreed with Beamer.
“Lobbyists in charitable groups have great influence and will fight the cap on deductions,” Callan said.
Indeed, the fight is already under way. Several groups, including the Community Foundation of the Holland/Zeeland Area and The Jewish Federations of North America, one of the country’s largest philanthropies representing some 150 Jewish federations, reportedly vowed to fight the measure.
Meanwhile the experts said, they will focus on what’s best for their clients.
“We have clients who are very charitably inclined and we will help them process the annual gifts they make to charitable organizations,” Beamer said.
Rates Will Likely Rise
Even if Congress averts the “fiscal cliff,” economists believe that the capital gains tax rates will likely increase over the next five years, according to published reports.
Beamer said one way to get around the capital gains tax liability is by giving away stock to a charity rather than selling it.
“We do quite a bit of that,” he said.
With the estate tax set to rise from 35 percent — above the $5 million threshold for an individual or $10 million for a couple — to 55 percent with the exemption dropping to $1 million when the Bush tax cuts expire, and if nothing is done, this becomes a big issue for advisers.
“We don’t want our clients to give away their estate, if they might have a need for the assets and want to retain their lifestyle,” said Tobiason. He added, “When we look at charities, the decision-making process is going to be very similar to last year and the year before.”
With clients being inclined to give more when they feel good about their own finances and the overall economy, 2013 may be better than 2012, Tobiason speculated.
“People are more optimistic about 2013,” he said.
Callan, who manages the assets of top wage-earners who have sold companies or accumulated wealth by taking a company public, said his clients tend to give based on their income.
However, he said, most individuals give between $50,000 to $300,000 a year.
“If Obama’s proposal passes, it (the amount of donations) could be cut in half,” Callan projected.
Marion Webb is a freelance writer.