Brian M. Sagrestano, JD, CFRE
The Impact on Charitable Giving of The 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 will see a 2% decrease in take-home pay starting with their first paycheck in 2013.
You should be aware The Affordable Care Act of 2010 also imposes new taxes to help offset healthcare cost increases. Its significant provisions are also noted below.
Key tax code changes include:
- 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, 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 1.45%.
Long-Term Capital Gains and Qualified Dividends:
- Rates: The Act maintains the preferential 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 (this equaled $5.12 million for 2012; the numbers are not in yet for 2013).
- 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.
- Special Rules for 2012 Charitable Gifts: Since 2012 has already closed, the Act includes two special provisions to allow for 2012 gifts: any qualified distributions made in January directly to charities from IRA accounts will be deemed to have been completed on December 31, 2012, if the taxpayer so chooses; individuals who took outright distributions from their IRA accounts in December of 2012 can transfer up to $100,000 of that amount to charities (subject to the rules governing Charitable IRA Rollovers) and elect to treat it as a direct distribution to charity in 2012.
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 likely will not impact charitable giving behavior in a meaningful way for now.
When surveyed, the majority of charitably-minded individuals indicate that they give because of the mission of the charity, not because of tax law incentives. However, these individuals also share that they want their charitable gifts to be as tax-efficient as possible and do seek out ways to lower their tax bill using charitable gifts.
So there are concerns that additional changes to the tax code could impact charitable giving in the future – not necessarily on the decision of whether or not to give, but on the choice of gift type and gift amount. Some groups, on the other hand, may find new incentives to give in such changes (please see “What’s Next?” below for further discussion).
The salient implications of the Act are as follows:
- High Income Earners: Those exceeding the $200,000/$250,000 and/or the $400,000/$450,000 income threshold levels will see their 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. For those no longer subject to the AMT, charitable gifts may prove to be an effective way to lower their tax bill.
- Investors: Gifts of highly appreciated assets continue to make sense for everyone, as the donor benefits from both an income tax deduction and avoidance of capital gains tax. For people 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 did not dramatically impact charitable giving, 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 the National Debt.
These additional discussions will likely occur as the Congress bumps up against deadlines for the debt ceiling (late February/early March), continuing budget resolution (March) and sequester (automatic spending cuts – March).
Many of these discussions have included provisions which could negatively impact charitable giving:
- One proposal suggests capping all income tax deductions for earners above a certain threshold, which would substantially reduce the value of the income tax charitable deduction. These are the very people who give the majority of the dollars to charity each year.
- Another proposal suggests capping the value of the income tax charitable deduction at 28%, meaning that those in the new 39.6% bracket would pay income tax of 11.6 cents of every dollar donated.
When surveyed, many of these individuals have indicated that they will decrease the dollar amount of their charitable giving to offset any tax increases. Again, since these individuals give the majority of dollars to charity each year, such proposals could have substantial consequences for charitable giving if enacted.
Of course, it is impossible to predict the future of tax policy. It is also not wise to let the so called “tail” of tax policy “wag” the charitable giving “dog.” Individuals give because they believe in the mission of the charity. The tax incentives are simply a mechanism that enables donors to use pre-tax dollars to help support those in need for the betterment of all.
With that in mind, in the coming year charities should:
- Focus on mission when talking to donors, and
- Encourage Congress and the President to protect the income tax charitable deduction to incentivize new charitable giving.
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