Charitable Aspects of the Fiscal Cliff Deal
A fiscal cliff deal finally materialized on January 2 with the passage of the American Taxpayer Relief Act of 2012. The legislation included a handful of new tax provisions as well as a significant number of tax extenders previously scheduled to expire either in 2011 or 2012. A few of these provisions and extenders will more than likely have a direct effect on charitable organizations and their fundraising efforts, including the reinstatement of the Pease limitation and the extension of the qualified charitable IRA distribution.
The phaseout of itemized deductions for higher income taxpayers, also known as the Pease limitation, is making a comeback for 2013 after being reduced from 2006 to 2009 and completely repealed from 2010 to 2012. For 2013, single taxpayers with adjusted gross income of more than $250,000 ($300,000 for joint filers) will have their itemized deductions phased out at a rate of 3% of income over the applicable threshold, up to 80% of total itemized deductions. Since an individual’s charitable contributions are claimed as an itemized deduction it might seem at first glance that it is going to become more costly from a tax perspective for higher income taxpayers to write those contribution checks. However, the limitation is really a function of income and not the deductions.
For example, a married couple with adjusted gross income of $500,000 would have their itemized deductions reduced by the lesser of $6,000 or 80% of total itemized deductions. So whether this couple made charitable contributions of $10,000 or $100,000, their itemized deductions would be limited by $6,000. However, due to the perceived loss in benefit, it may cause some potential contributors to stop and think before making donations in 2013 and beyond if they are unaware of the actual function of the limitation.
Additionally, the qualified charitable IRA distribution provision put in place back in 2006 and set to expire at the end of 2011 was extended through 2013. Under this provision, annual IRA distributions by eligible individuals age 701/2 or older may direct their distribution directly to a qualified charitable organization rather than taking the cash distribution. By doing this, taxpayers do not receive a charitable deduction but are able to exclude the amount of the qualified distribution from income in an amount up to $100,000 per year. Highlighted below are a couple of interesting effects of the extension:
- A special provision was included relating to IRA cash distributions taken in December 2012 that can be treated as a qualified charitable IRA distribution for 2012 if the taxpayer contributes an equivalent amount of cash to a qualified charitable organization by January 31, 2013. Organizations looking for some additional funding may want to reach out to potential donors who might be eligible to take advantage of this provision.
- For 2013, taxpayers and organizations should be aware of the interplay between the qualified charitable IRA distribution provision and the reinstated Pease limitation. Taxpayers who might otherwise take cash distributions from their IRA accounts and then make separate cash contributions to a charity of their choosing may be limited on the amount of itemized deduction received even though the full amount of income is picked up. By making a qualified charitable IRA distribution, the taxpayer gets the IRA distribution tax-free and the charity gets the contribution.
The above information is just a small piece of the overall legislation recently enacted, but some of the more impactful provisions relating to charitable organizations. For additional details or questions, please consult your tax adviser.