How the Fiscal Cliff Legislation Affects Your Charitable Gift

Both the legislation enacted to avoid the fiscal cliff (officially the American Taxpayer Relief Act of 2012 or ATRA) and the previously enacted Affordable Care Act have implications for charitable giving. Here is a summary of how charitable gifts by people in different financial circumstances are affected.

All individuals aged 70 1/2 and over who have an IRA.

The charitable IRA rollover has been extended through December 31, 2013. This year, an individual who is at least 70 1/2 can transfer up to $100,000 from his or her IRA to one or more charities and the amount transferred will count towards the required minimum distribution and will not be included in taxable income. The previous restrictions regarding types of eligible charitable organizations still apply.

Individuals with income of $200,000 or less and couples filing jointly with income of $250,000 or less.

The tax rates on both compensation (earned) and investment income are unchanged for this group, so the tax savings from charitable gifts remain the same.

Individuals with income between $200,000 and $400,000 and couples filing jointly with income between $250,000 and $450,000.

The tax rates on compensation income were not changed by the recent fiscal cliff legislation. However, the pre-existing Affordable Care Act imposes a 3.8% surtax on the portion of investment income (capital gain, dividend, interest, and rental) that exceeds $200,000 for single persons and $250,000 for couples filing jointly.

This increases the tax benefits of contributing appreciated property. Previously, when this group of taxpayers contributed appreciated securities in lieu of selling them they avoided a 15% tax on the gain; now they will avoid paying an 18.8% tax on that portion of the gain that exceeds the $200,000/$250,000 threshold.

Individuals with income exceeding $400,000 and couples filing jointly with income exceeding $450,000.

The tax rate on compensation income in excess of those threshold amounts increases from 35% to 39.6%, and the tax rate on capital gain and dividend income increases from 15% to 20%. Additionally, investment income in excess of the $200,000/$250,000 threshold is subject to the 3.8% surtax for funding national health programs.

Thus, people in this highest income group are subject to these federal rates:

As a result of these higher rates, these individuals will (with one qualification noted immediately below) realize greater tax savings from all types of charitable gifts, whether made with cash or appreciated property. The most significant increase in tax savings will result from gifts of appreciated property.

Limitation on Itemized Deductions

ATRA revives the so-called Pease limitation on itemized deductions for high-income taxpayers, but with a much higher income threshold. Itemized deductions now have to be reduced by the lesser of either 80% of itemized deductions or 3% of adjusted gross income in excess of $250,000 for single filers and $300,000 for those filing jointly and for surviving spouses.

Because of deductions for mortgage interest, state income tax, and property tax, most taxpayers will see very little if any effect on their charitable deductions.

Charitable bequests

The exemption from federal estate tax is $5,250,000, indexed for inflation. The excess over that amount is taxed at a rate of 40%. (In 2012, the tax rate for estates in excess of the exempted amount was 35%.)

The increased tax rate means that estate-tax savings will be larger for high-net-worth individuals who leave charitable bequests.

Additional surtax on compensation income

Individuals with compensation income of more than $200,000 and couples filing jointly with income of more than $250,000 will pay a 0.9% surtax. This is in addition to the existing 1.45% Medicare/Medicaid tax that employees pay on earned income.

While this provision affects the spendable income of these people, it has no direct effect on charitable gifts.

Note

The legislation designed to avoid the fiscal cliff contains many provisions not discussed here. This article deals only with certain provisions that have the most implications for charitable giving. In the event that tax-reform legislation is enacted later in the year, there could be further consequences for charitable giving.