A blog by Grant Montgomery, co-founder of a 501c3 that provides emergency services and sustained development for communities, families and children on 5 continents. Articles and commentary on Philanthropy, Global Aid and Development.
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.
Over its nearly 100-year history, the charitable deduction has become one of the most time-tested provisions in the Internal Revenue Code. But it has also been a perennial target by people on both ends of the political spectrum who want to eliminate or restrict it.
While economists have long studied the impact of the deduction, they have not reached a clear consensus on how much it matters. A new study, however, along with recently released IRS data make it quite clear that America’s charitable organizations could be hurt greatly if donors lost all or part of the charitable income-tax deduction as lawmakers seek ways to avert the looming “financial cliff.”
The new study of the wealthy and their philanthropy, released last month by Bank of America, asked affluent people (mostly with incomes of $200,000 or more and net assets of at least $1-million) how they might alter their giving if deductions were eliminated.
Just under 50 percent said their giving would remain the same. But nearly 49 percent said they would decrease their giving—and 20 percent of those people said they would “dramatically decrease” their giving. Less than 2 percent said their giving would increase.
Some point out that most donors wouldn’t be affected by changes in the charitable deduction because 70 percent of Americans don’t itemize. While it is true that people who don’t itemize often give generously from their incomes, they don’t provide the lion’s share of the gifts that help fuel the nonprofit world.
In 2010, the 30 percent of Americans who itemize provided 79 percent of the money “Giving USA” reported that individuals donated to nonprofit organizations.
If a loss of the charitable deduction caused people who itemize deductions to reduce their giving by just 20 percent, that would mean a $34-billion drop in charitable giving, by far the largest decrease since the Great Depression. To put that in perspective, $34-billion is more than three times the sum that individuals donated to all U.S. colleges received last year (not counting bequests).
If nonprofits suddenly had to reduce costs by $34-billion, they could well need to eliminate 5 percent of their work force, or 680,000 jobs. That could increase the unemployment rate in the United States from 7.9 percent to 8.4 percent.
And if government cuts spending, charitable giving will have to play an even more important role in our society as those cuts inevitably put even more strain on the nonprofit infrastructure that enriches Americans’ lives in countless ways.
Excerpts of an article by Robert Sharpe, a fundraising consultant