Congress passed the American Taxpayer Relief Act of 2012 (H.R. 8) in a deal to avert the fiscal cliff. The following provides pieces of the bill relevant to the philanthropic sector.
- The charitable deduction will continue to be coupled with an individual’s or household’s corresponding tax rate. In other words, there is no cap on charitable deductions.
- The tax rate will be increased to 39.6 percent for individuals making more than $400,000 a year and households making more than $450,000. The previous rate for those earners was 35 percent.
- The estate tax will have a $10 million exemption for couples, $5 million for individuals, and a top tax rate of 40 percent.
- The bill extends the IRA charitable rollover through December 31, 2013. This provision permits tax-free distributions to an eligible charity from an IRA held by someone age 70½ or older of up to $100,000 per taxpayer, per taxable year.
- The provision includes two transition rules to allow donors to make 2012 contributions. First, the extension allows individuals who received an IRA distribution in December 2012 to elect to count that distribution (or a portion thereof) as a 2012 IRA charitable rollover if the individual transfers the amount in cash before February 1, 2013, to an eligible charity. Additionally, the extension allows donors to make distributions directly to eligible charities before February 1, 2013, and elect to have such distributions treated as qualified charitable distributions in 2012. This change may be of particular benefit to donors who would like to take advantage of the rollover in both 2012 and 2013.
In 2013, itemized deductions for higher income taxpayers will be reduced by the lesser of (1) 3 percent of the amount by which the taxpayer’s income exceeds $250,000 for individual filers, $275,000 for heads of households, or $300,000 for married couples filing jointly (these amounts are adjusted annually for inflation) or
(2) 80 percent of the value of the taxpayer’s itemized deductions. This reduction of itemized deductions is referred to as the Pease Limitation.
Source: Council of Foundations