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How the Recent Fiscal Cliff Bill Affects Charitable Giving

by Brenda Peluso

Reprinted with permission from Maine Nonprofit Law E-Bulletin;

January 2013; Robert H. Levin – Attorney at Law

There are several provisions of the recently enacted fiscal cliff legislation that concern the federal income tax effects of charitable donations. Donors and charities should be aware of the following:

Increased Ordinary Income Tax Rates for High-Income Taxpayers – The vast majority of individuals will enjoy continued low tax rates in place since 2001. Only individuals earning over $400,000 in ordinary income and joint filers earning over $450,000 will see the tax rate on ordinary income above that threshold increase from 35% to 39.6%, with those thresholds indexed to inflation. A very small percentage of Americans (below 1%), and an even smaller percentage of Mainers, will be affected by this income tax rate increase. In theory, this higher top marginal rate incentivizes charitable giving, as a high-income taxpayer will save 39.6 cents in taxes for every dollar donated to charity. However, the Pease limitation (see below) and further possible limitations on itemized deductions (see below) may cut against this higher incentive.

Increased Capital Gains and Dividend Tax Rates for High-Income Taxpayers – The capital gains tax rate is important to know for those donors considering gifts of appreciated capital gains property (such as stocks and mutual funds, as well as land). The top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with taxable incomes exceeding $400,000 ($450,000 for joint filers). However, as a result of the Affordable Care Act, there will also be a new 3.8% surtax on investment-type income for high-income taxpayers ($200,000 for single filers, $250,000 for joint filers), so the overall rate for taxpayers above both thresholds will be 23.8%. But most people are well below these thresholds, and will continue to enjoy a 0% capital gains tax rate. Those in the middle, i.e., taxpayers subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends (and 18.8% for those subject to the surtax).

Charitable Giving Tax Extensions Through December 31, 2013

  • IRA Donations — Donors age 70½ and older can transfer up to $100,000 in 2013 to a public charity directly from their IRA without incurring any tax liability.
  • Enhanced Incentives for Conservation Easement Donations – Enhanced income tax charitable deductions for gifts of conservation easements have been extended, and made retroactive to include 2012. Estate tax incentives for conservation easement gifts were also made permanent.
  • Contribution of Food Inventory — enhanced deductions for contributions of food inventories
  • Contributions of Property by S Corporations — limiting an S corporation shareholder’s reduction in basis of the S corporation’s stock to a pro rata share of basis (rather than fair market value) of property contributed by the corporation.
  • However, two charitable giving tax provisions were not extended: contributions of book inventories to public schools and corporate contributions of computer inventory.

Reinstatement of Pease Limitation on Itemized Deductions – The Pease limitation was originally enacted in 1990, then suspended for several years, and starting in 2013 is back in action. Pease limits certain itemized deductions, including charitable deductions, above a certain adjusted gross income (AGI) threshold. The AGI threshold is $250,000 for single filers and $300,000 for joint filers. Itemized deductions are reduced by 3 percent of the amount over these thresholds, up to a maximum 80 percent reduction. For detailed examples of how Pease would limit a charitable deduction, see http://www.independentsector.org/pease_limitation_on_itemized_deductions. However, the takeaway message for Maine charities is that the vast majority of their donors will not be affected by the Pease Limitation because of the high AGI thresholds.

Estate Tax Thresholds Remain Very High – The estate tax (and gift tax and generation-skipping transfer tax) remains largely unchanged from the past couple years, with a $5,120,000 personal exemption (and $10,240,000 per couple) in place, and now indexed to inflation. The estate tax rate increases from 35% to 40%. This relatively high threshold ensures that all but a handful of the wealthiest Mainers will not be subject to any federal estate tax; nationally, estimates show that fewer than 2 out of every 1,000 people who die (i.e., less than 0.2%) owe any estate tax under this exemption threshold.

 

Keep in mind that further changes to charitable giving tax incentives are quite possible over the next few months, as the Obama Administration has signaled its intent to achieve further tax revenues by implementing an additional limitation on itemized deductions at the 28% level. For example, high-ordinary-income taxpayers would only save 28 cents on the dollar for every charitable donation made, instead of 33, 35, or 39.6 cents under the current marginal tax rates.

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