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. Fortunately, some of the proposals such as caps on charitable deductions or limits on tax savings from charitable gifts were not enacted. 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 70½ and older have been able to make a qualified
charitable distribution (QCD) up to $100,000 each year. ATRA extends and
expands this option for 2012 and 2013. There are three categories of
First, some individuals in 2012 made QCDs directly from their IRA custodian to
charities with the hope that the law would be retroactive. These QCDs are
qualified retroactive to January 1, 2012.
Second, individuals who did not
make a QCD in 2012 can do so during January of 2013. This is similar to
2011, when it was possible to do a QCD for the prior year in January and a
second QCD in the remaining 11 months of the year. If an individual has
not made a QCD in 2012, this allows a generous person to make two $100,000 QCDs
Third, many individuals had hoped to do a QCD in 2012, but in December of 2012
received their IRA required minimum distribution (RMD). If these
individuals transfer those funds to charity during January of 2013, they will
not report the IRA distribution as income. Effectively, the December 2012
RMD is converted to a January QCD that qualifies for 2012.
GiftLegacy Users – Important Opportunity! For GiftLegacy users, there is
an opportunity to conduct a one or two week “IRA Special Gift” campaign.
GiftLegacy users can go to Cresmanager, Literature, Campaigns, IRA Rollover
Campaign and will have access to an eBlast and a postcard. The campaign
should be conducted by the second week of January.
Your donors who have taken an RMD in December will be able to make a cash gift
in January to the charity. The charity will want to send the donor a
letter of confirmation that the donor is electing the QCD. An example
letter is published in GiftLaw Pro Chapter 4.6.8, the IRA Charitable Rollover
section. This is a superb opportunity to receive cash gifts this
January. The opportunity will terminate on January 31, 2013, so it is
crucial to move quickly. GiftLegacy users who have built large email
distribution lists will find that here is a wonderful cash bonus this month for
excellence in eMarketing. That large email list will produce welcome cash
Individual Income Tax Rates on Ordinary Income
The existing tax brackets of 10%, 15%, 25%, 28%, 33% and 35% will be
extended. There is a new 39.6% 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.
Charitable Impact: Those individuals with higher
incomes are now facing larger taxes. However, the tax savings from a
charitable gift for individuals with state and federal tax brackets from 40% to
46% are now increased. High-income donors may make larger gifts in 2013.
Long-Term Capital Gains
The capital gains rate of 0% for those in the 10% and 15% bracket and 15% for
those in most higher brackets will be extended. However, individuals who
are subject to the 39.6% tax bracket will have a 20% 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% Medicare tax, the capital gains
rate for upper-income persons will be 23.8%.
Charitable Impact: The top federal tax rate for
sales of major assets will increase from 15% in 2012 to 23.8% in 2013. In
those states that also have a state tax, the combined capital gain rate for
major sales will be 28% to 32%. This will greatly increase interest in
charitable remainder unitrusts and charitable remainder annuity trusts.
Charities should appropriately emphasize the much larger tax savings available
in 2013 for charitable trusts.
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
couple and $50,600 for single persons.
Charitable Impact: The permanent indexed AMT
exclusion will have fairly modest charitable impact.
Gift and Estate Taxes
Marital portability and the $5 million (with indexed increases) applicable
exclusion amount for gift and estate taxes are made permanent. For 2013,
the expected IRS ruling will set the applicable exclusion amount at $5.25
million. The top rate for gift and estate taxes is 40%.
Charitable Impact: The permanent gift and estate
provisions will encourage many individuals to update their estate plans.
This is a great marketing opportunity for bequests from estates of all
sizes. For larger estates, a testamentary unitrust, gift annuity or lead
trust are excellent planning options.
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% of the
adjusted gross income of the taxpayer. The maximum reduction for
very-high-income persons is 80% of the itemized deductions.
ATRA creates new fixed limits for the 3% floor. Married couples will be
subject to the reduced deductions for adjusted gross income (AGI) over
$300,000. Single persons will use a floor of $250,000 of AGI.
Charitable Impact: Those donors with larger
incomes will suffer a modest to moderate reduction in their charitable tax
savings. This historically has not had significant impact on charitable
giving. However, very-high-income persons may lose as much as 80% of
their charitable tax savings.
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.
Charitable Impact: This will have fairly modest
Various Deductions and Charitable Extenders
There are several other provisions that historically have been extended.
There are expanded limits for gifts of conservation easements with a 50%
deduction level and carry forwards for up to 15 years. In addition to the
IRA Rollover, gifts of apparently wholesome food, property gifts by Subchapter
S corporations and payments to controlled subsidiaries provisions are all
extended until the end of 2013.
Charitable Impact: The enhanced deductions for
food gifts will be very welcome for food banks and similar charitable
organizations. Because there has been a significant growth of Subchapter
S corporations during the past decade, the ability for Sub S corporations to
make gifts of appreciated land or stock and flow through the deductions to
owners is quite beneficial. Finally, land conservancy organizations and
similar charities will appreciate the extension of the conservation gift
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 advisors will
significantly increase during 2013.
Copyright © 2013 By A. Charles Schultz, J.D.