Year-end tax deal leads wealthy to seek shelter through charitable giving.
The American Taxpayer Relief Act of 2012 brought higher income taxes, but it also set the stage for more charitable giving by the wealthy.
The bill that averted the fiscal cliff saved the nation from sequestration at the beginning of 2013. Its provisions raised the top marginal income tax rate to 39.6% from 35% and boosted the top marginal rate on long-term capital gains and dividends to 20%, from 15%.
Having those higher rates might encourage wealthier individuals to part ways with some of their best assets to soften the blow they'll get from capital gains, said Amy Danforth, senior vice president of program and marketing at Fidelity Charitable.
“The marginal rate on capital gains going to 20% fuels giving the best assets; over half of our contributions each year come from non-cash assets,” she said. “For advisers, this is an opportune time to talk to clients about charitable giving for 2013 and to network with that person's tax adviser so that giving aligns with tax strategies.”
She noted that charitable contributions go hand-in-hand with IRA Roth conversions as a way to offset the income tax bill clients need to pay after making these conversions.
Since the first of the year, Fidelity has seen a wave of giving activity by clients who felt their charitable deductions would be worth more in today's higher tax environment. Grants to nonprofit groups climbed to $448 million in the first quarter, up 39% year over year, according to Fidelity.
Contributions to donor-advised funds, which are accounts that are maintained by nonprofit groups but that allow the donor to retain advisory privileges on distribution and investments, held steady at $369 million, matching the first-quarter record set in 2012, according to Fidelity.
While the pace of charitable giving increased at the end of last year, donating for the whole year was strong. At Fidelity Charitable, giving rose 24% over 2011, to $3.6 billion.
Last year's uncertainty over the tax environment helped.
“About 20% of that activity was driven by the regulatory environment and potential tax changes,” Ms. Danforth said. “We're also hearing that many people felt 2013 would be a better environment from a tax situation, so we've seen continued [giving] momentum.”
