The Impact of the New Tax Act on Giving – Surprisingly Charitable
On January 1, 2013, both the Senate and House passed the American Taxpayer Relief Act of 2012 (ATRA). The bill resolved the “fiscal cliff” and includes a number of provisions that will be favorable for philanthropy and charitable giving.
Because the general trend of the bill is to create higher tax rates for upper-income taxpayers, the benefits of charitable giving will be readily apparent to those individuals.
IRA Charitable Rollover — Since 2006, IRA owners age 70 ½ and older have been able to make a qualified charitable distribution up to $100,000 each year. ATRA extends and expands this option for 2012 and 2013. There are three categories of potential donors.
First, some individuals in 2012 made gifts directly from their IRA custodian to charities with the hope that the law would be retroactive. These gifts are qualified retroactive to January 1, 2012.
Second, individuals who did not make an IRA gift in 2012 can do so during January of 2013. This is similar to 2011, when it was possible to do an IRA gift for the prior year in January and a second IRA gift in the remaining 11 months of the year. If an individual has not made an IRA gift in 2012, this allows a generous person to make two IRA gifts in 2013.
Third, many individuals had hoped to do an IRA gift in 2012, but in December of 2012 received their IRA required minimum distribution. If these individuals transfer those funds to charity during January of 2013, they will not report the IRA distribution as income. Because the IRA distribution is not included in income, there is not an added charitable tax deduction. Effectively, the gift of cash from your December 2012 IRA distribution converts it into a 2012 IRA gift. But this cash gift must be given during January of 2013.
Income Tax Rates — The existing tax brackets of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent will be extended. There is a new 39.6 percent bracket for married persons with $450,000 of taxable income, heads of household with $425,000, and single persons with $400,000 of taxable income.
Long-Term Capital Gains — The capital gains rate of 0 percent for those in the 10 percent and 15 percent bracket and 15 percent for those in most higher brackets will be extended. However, individuals who are subject to the 39.6 percent tax bracket will have a 20 percent capital gain rate. In addition, because capital gains for those with incomes over $250,000 married or $200,000 single will be subject to the 3.8 percent Medicare tax, the capital gains rate for upper-income persons will be 23.8 percent.
Alternative Minimum Tax — The alternative minimum tax was initially intended to cover only high-income persons. However, with the increase in incomes, AMT continued to apply to larger and larger numbers of individuals. ATRA sets a permanent indexed AMT exemption amount. For 2012, the amounts will be $78,750 for married couples and $50,600 for single persons.
Gift and Estate Taxes — Marital portability and the $5 million (with indexed increases) applicable exclusion amount for gift and estate taxes are made permanent. The top rate for gift and estate taxes is 40 percent.
Itemized Deduction Limits — In prior years, there were limitations on itemized deductions that were called the “Pease” limits. The deductions over a floor are reduced by 3 percent of the adjusted gross income of the taxpayer.
Personal Exemption Limits — The personal exemption phase-out will be reinstated for married couples with AGI over $300,000 and single persons with $250,000 of AGI.
Summary — ATRA was, on balance, fairly kind to philanthropy. Donors with higher incomes and larger capital gains tax bills will find new reasons to engage in charitable planning. The probable level of interest in gift planning education and concepts by donors and their professional tax advisors will significantly increase during 2013.