New Alternative Minimum Tax rules might mean donating more to charity

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The beginning of fall brings wafts of pumpkin spice every thing, from seasonal lattes to limited-edition Cheerios, and altering colors, but in addition the start of the ultimate push for charitable giving, which have to be performed by Dec. 31 if you wish to reap the tax advantages in your 2023 tax return.

However when you’ve seen an additional chill within the air this 12 months, it could be coming from a concern that proposed changes to the Alternative Minimum Tax (AMT), set to take impact Jan. 1, 2024, will considerably damper the tax benefits historically related to charitable donations, thus decreasing the extent of charitable giving.

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My objective right here is to reassure each donors and charities that, for probably the most half, the brand new AMT gained’t have an effect on very many individuals, and that even high-income donors, who earn most of their earnings from employment or self-employment, are unlikely to be affected.

There are, nonetheless, some distinctive conditions the place AMT may apply in 2024, suggesting that for a really choose group of philanthropists who donate considerably to charity, doing a little planning this fall, maybe by making a major reward in 2023 as an alternative of in 2024 (or past), may reap important tax financial savings.

The AMT system imposes a minimal stage of tax on taxpayers who declare sure deductions, exemptions or credit to cut back the tax they owe to very low ranges. There’s a parallel tax calculation beneath the AMT that permits fewer deductions, exemptions and credit than beneath the common earnings tax calculation. If the quantity of tax calculated utilizing the AMT system is greater than the quantity of tax owing utilizing the common tax system, the distinction owing is payable as AMT for the 12 months.

Within the 2023 federal funds, the federal government introduced that “to higher goal the AMT to high-income people,” a number of modifications could be made to the principles for calculating the AMT, starting in 2024. The modifications, which have been formally launched in Parliament over the summer time, embody elevating the AMT fee to twenty.5 per cent from 15 per cent, rising the quantity of earnings beneath which AMT won’t apply ($173,000 in 2024) and broadening the AMT base by limiting sure quantities that scale back taxes. All provinces and territories additionally impose AMT, which is mostly calculated as a proportion of the federal AMT.

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Since AMT can solely come up in 2024 in case your earnings calculated beneath the AMT guidelines exceeds the proposed $173,000 AMT exemption, most taxpayers don’t have to fret about it. However AMT might be a problem for higher-income taxpayers if a charitable reward is made in 2024, versus 2023. Why? As a result of a few AMT modifications particularly goal charitable giving.

First, beneath the traditional tax guidelines for charitable donations, you get a federal credit score of 15 per cent for the primary $200 of items. The federal credit score fee jumps to 29 per cent for cumulative donations above $200 (or 33 per cent in case you have earnings of greater than $235,675 in 2023). Parallel provincial credit work equally.

Beneath the present AMT guidelines, the donation tax credit score might be totally utilized towards any AMT owing. Beginning in 2024, nonetheless, solely 50 per cent of the donation tax credit score might be allowed when calculating the AMT. This alone, nonetheless, isn’t sufficient to trigger AMT, even for high-income donors.

It’s solely a priority when a donor earns some tax-preferred earnings or takes sure deductions. For instance, a donor who has a major capital acquire, workouts qualifying worker inventory possibility advantages or has losses carried ahead from a previous 12 months might be affected.

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Let’s take somebody who realizes a major capital acquire in 2024, maybe on the sale of a enterprise or earnings property. Beneath the common tax system, solely 50 per cent of the capital acquire is taxable. Beginning in 2024, nonetheless, 100 per cent of the capital acquire might be taxable for AMT functions. Couple that with a charitable donation credit score, which might solely be 50 per cent allowable beneath the AMT system, and the quantity of AMT payable by the donor may enhance.

The second AMT adjustment is said to in-kind donations of publicly traded shares, mutual funds or segregated funds to a registered charity. Beneath the unusual tax guidelines, you get a donation receipt equal to the truthful market worth of the securities or funds being donated, and also you pay zero capital positive aspects tax on any accrued acquire.

Beginning in 2024, nonetheless, 30 per cent of the capital positive aspects on securities which are donated in-kind might be included in earnings beneath the brand new AMT guidelines. Since solely 50 per cent of the donation credit score might be allowed for AMT functions as defined above, the result’s that for important donations of publicly listed securities, extra AMT might lead to 2024 that might not have arisen had the donation been made in 2023.

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Because of this now’s the time to succeed in out to your tax adviser to see whether or not you must do some proactive planning in 2023 to attenuate the influence of AMT in 2024. Such planning may embody triggering a capital acquire in 2023, exercising worker inventory choices or making a charitable reward earlier than year-end.

A remaining planning consideration is that when you’re uncertain of the place you finally wish to donate, you possibly can think about making your reward in 2023 to a donor advised fund (DAF), which is an account at a public basis that holds your donation. You’ll get a 2023 tax receipt in your donation and keep away from any 2024 AMT penalties of delaying your reward. Then, in 2024 and past, you’ll be able to have the DAF make distributions to any of your favorite charities.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.

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