The start of fall brings wafts of pumpkin spice everything, from seasonal lattes to limited-edition Cheerios, and changing colours, but also the beginning of the final push for charitable giving, which must be done by Dec. 31 if you want to reap the tax benefits on your 2023 tax return.
But if you’ve noticed an extra chill in the air this year, it may be coming from a fear that proposed changes to the Alternative Minimum Tax (AMT), set to take effect Jan. 1, 2024, will significantly damper the tax benefits traditionally associated with charitable donations, thus reducing the level of charitable giving.
My goal here is to reassure both donors and charities that, for the most part, the new AMT won’t affect very many people, and that even high-income donors, who earn most of their income from employment or self-employment, are unlikely to be affected.
There are, however, some unique situations where AMT could apply in 2024, suggesting that for a very select group of philanthropists who donate significantly to charity, doing some planning this fall, perhaps by making a significant gift in 2023 instead of in 2024 (or beyond), could reap significant tax savings.
The AMT system imposes a minimum level of tax on taxpayers who claim certain deductions, exemptions or credits to reduce the tax they owe to very low levels. There is a parallel tax calculation under the AMT that allows fewer deductions, exemptions and credits than under the regular income tax calculation. If the amount of tax calculated using the AMT system is more than the amount of tax owing using the regular tax system, the difference owing is payable as AMT for the year.
In the 2023 federal budget, the government announced that “to better target the AMT to high-income individuals,” several changes would be made to the rules for calculating the AMT, beginning in 2024. The changes, which were formally introduced in Parliament over the summer, include raising the AMT rate to 20.5 per cent from 15 per cent, increasing the amount of income below which AMT will not apply ($173,000 in 2024) and broadening the AMT base by limiting certain amounts that reduce taxes. All provinces and territories also impose AMT, which is generally calculated as a percentage of the federal AMT.
Since AMT can only arise in 2024 if your income calculated under the AMT rules exceeds the proposed $173,000 AMT exemption, most taxpayers don’t have to worry about it. But AMT could be an issue for higher-income taxpayers if a charitable gift is made in 2024, as opposed to 2023. Why? Because a couple of AMT changes specifically target charitable giving.
First, under the normal tax rules for charitable donations, you get a federal credit of 15 per cent for the first $200 of gifts. The federal credit rate jumps to 29 per cent for cumulative donations above $200 (or 33 per cent if you have income of more than $235,675 in 2023). Parallel provincial credits work similarly.
Under the current AMT rules, the donation tax credit can be fully applied against any AMT owing. Starting in 2024, however, only 50 per cent of the donation tax credit will be allowed when calculating the AMT. This alone, however, is not enough to cause AMT, even for high-income donors.
It’s only a concern when a donor earns some tax-preferred income or takes certain deductions. For example, a donor who has a significant capital gain, exercises qualifying employee stock option benefits or has losses carried forward from a prior year could be affected.
Let’s take someone who realizes a significant capital gain in 2024, perhaps on the sale of a business or income property. Under the regular tax system, only 50 per cent of the capital gain is taxable. Starting in 2024, however, 100 per cent of the capital gain will be taxable for AMT purposes. Couple that with a charitable donation credit, which would only be 50 per cent allowable under the AMT system, and the amount of AMT payable by the donor could increase.
The second AMT adjustment is related to in-kind donations of publicly traded shares, mutual funds or segregated funds to a registered charity. Under the ordinary tax rules, you get a donation receipt equal to the fair market value of the securities or funds being donated, and you pay zero capital gains tax on any accrued gain.
Starting in 2024, however, 30 per cent of the capital gains on securities that are donated in-kind will be included in income under the new AMT rules. Since only 50 per cent of the donation credit will be allowed for AMT purposes as explained above, the result is that for significant donations of publicly listed securities, additional AMT may result in 2024 that would not have arisen had the donation been made in 2023.
This means that now is the time to reach out to your tax adviser to see whether you should do some proactive planning in 2023 to minimize the impact of AMT in 2024. Such planning could include triggering a capital gain in 2023, exercising employee stock options or making a charitable gift before year-end.
A final planning consideration is that if you’re unsure of where you ultimately want to donate, you could consider making your gift in 2023 to a donor advised fund (DAF), which is an account at a public foundation that holds your donation. You will get a 2023 tax receipt for your donation and avoid any 2024 AMT consequences of delaying your gift. Then, in 2024 and beyond, you can have the DAF make distributions to any of your favourite charities.