Its Impact on Charitable Giving
By Brian M. Sagrestano, JD, CFRE
On January 1, 2013, Congress passed the bi-partisan, 157-page American Taxpayer Relief Act of 2012.
This new law makes permanent several expiring tax provisions passed in 2001 and 2003 and includes a wide variety of other provisions, including "tax-extenders" (tax code rules that are usually re-authorized on a regular basis but not made permanent).
The Act does not renew a temporary payroll tax "holiday" for earners. This means that most working Americans saw a 2% decrease in take-home pay starting with their first paycheck in 2013.
The Affordable Care Act of 2010 also imposed new taxes to help offset the cost of legislation. Its significant provisions are also noted below.
Key Tax Code Changes
- Income Taxes
- Rates: The Act increases the maximum income tax rate from 35% to 39.6% for individuals earning more than $400,000 and couples earning more than $450,000 ($400,000/$450,000). The new rates do not have an expiration date.
- Itemized Deductions: The Act reinstates the phase-out of itemized deductions and personal exemptions (Pease Amendment), but at a higher income level than in the past: $250,000/$300,000 (no expiration date).
- Alternative Minimum Tax (AMT): The Act includes a permanent fix, including a new, higher income threshold (indexed for inflation) at which the AMT applies.
- Credits: The Act extends the expanded child tax credit and earned income tax credits for five additional years.
- Affordable Care Act: For those earning more than $200,000/$250,000, it includes a supplemental Medicare tax levy of 0.9%.
- Long-Term Capital Gains and Qualified Dividends
- Rates: The Act maintains the preferential 0%, 10% and 15% rate for taxpayers earning less than $400,000/$450,000. Those earning more than the threshold will pay a 20% rate.
- Affordable Care Act: Those earning more than $200,000/$250,000 also pay a 3.8% net investment income tax.
- Gift and Estate Taxes
- Exemption Amount: The Act maintains the exemption amount at $5,000,000, indexed for inflation. For 2013, the exemption amount is $5,250,000.
- Rates: The Act increases top gift and estate tax rates from 35% to 40%.
- IRA Charitable Rollover
- (The IRA Charitable Rollover allows individuals over age 70½ to directly transfer up to $100,000 per year from an IRA account to one or more charities. This transfer counts toward the minimum required distribution rule for IRA accounts.)
- Extension: The Act extends the IRA Charitable Rollover for 2012 and 2013.
- Other Provisions
- The American Taxpayer Relief Act of 2012 also extends several additional provisions of interest to charities and charitably-minded individuals, including:
- The deduction of expenses for elementary and secondary school teachers (Sec. 201)
- The special rule for contributions of capital gain real property for conservation purposes (Sec. 206)
- The above-the-line deduction for qualified tuition and related expenses (Sec. 207)
- The enhanced charitable deduction for contributions of food inventory (Sec. 314)
- The basis adjustment to stock of S corporations making charitable contributions of property (Sec. 325), and
- The extension of significant Medicare and other health provisions (Title VI)
- Impact on Charitable Giving
- Because these tax law changes do not make significant changes to current tax laws, they are not likely to have a significant impact on your charitable giving choices. There are concerns about additional changes to the tax code that would/could impact charitable giving in the future (see below under "What's Next?"). If you are in one of the following groups, however, you may find that the Act offers you new incentives to give:
- High Income Earners: Those exceeding the $200,000/$250,000 and/or the $400,000/$450,000 income threshold levels will see taxes increase in 2013. The deduction available for charitable gifts may help to offset some of these additional taxes. However, this same group likely will be subject to the new income phase-outs on itemized deductions, so the value of their charitable deduction could be slightly reduced. Each individual will need to check with his/her tax preparer.
- Those Formerly Subject to the AMT: The AMT stripped away the benefits of many income tax deductions and exemptions. If you are no longer subject to the AMT, charitable gifts may prove to be an effective way to lower your tax bill.
- Investors: Charitable gifts of highly appreciated assets continue to make sense for everyone, as you benefit from both an income tax deduction and avoidance of capital gains tax. If you are above the $200,000/$250,000 and $400,000/$450,000 thresholds, these gifts are even more effective at lowering the tax bite.
- Those with Overfunded IRAs: The extension of the IRA Charitable Rollover will allow individuals who are required to take distributions from their IRA accounts to once again directly transfer some of those assets to charity. In so doing, they avoid the IRA distribution being added to their adjusted gross income for the year, which can trigger many of the new taxes for higher income earners.
While the American Taxpayer Relief Act of 2012 did not dramatically alter charitable giving incentives for now, both political parties in Washington have suggested there is substantially more to do in order to decrease spending and increase tax revenues to help eliminate the budget deficit and eventually pay down our debt.
These additional discussions will likely occur as the Congress bumps up against deadlines for the continuing budget resolution (March), sequester (automatic spending cuts - March) and the debt ceiling.
You and your tax preparer should monitor these discussions and their impact on your charitable giving. Some of the proposed provisions could reduce the value of the income tax charitable deduction, but charities are working hard to ensure that this doesn't happen.
Of course, it is impossible to predict the future of tax policy. But it is also not wise to let the so-called "tail" of tax policy "wag" the charitable giving "dog." You give because you believe in our mission and we hope that you will continue to do so - regardless of tax law changes from Washington - so that we may continue our important work.