Most people have an organization or cause they’re passionate about, and contributing financially to non-profit organizations may be a part of many peoples’ annual financial plans. In planning for 2013, consider the America Taxpayer Relief Act of 2012 that was part of the legislation to partially avoid the “fiscal cliff.” This legislation could have implications on your charitable giving intentions, particularly if your income exceeds certain thresholds.
The changes may enhance the tax advantages of making charitable donations in some cases, while at the same time creating a less favorable tax environment in other cases. It is important to note that most taxpayers won’t see any impact on the tax status of their charitable donations in 20131.
A popular strategy used in the past by individuals age 70½ or older was to roll IRA dollars directly to a qualified charity. The new tax bill reinstated this provision for direct charitable rollovers of up to $100,000 for 2013. The charitable IRA rollover offers two notable advantages:
1. Rather than claiming income from an IRA distribution and then deducting the amount of the contribution on a tax return, the money can be rolled directly to the charity. This avoids the need to claim income first before making the deduction, potentially reducing the overall tax liability2.
2. For those who must take required distributions from their Traditional IRA (an obligation after reaching age 70½), all or some of that distribution can be represented in the charitable IRA rollover. Again, this eliminates the requirement to claim income when the individual may not need it to meet living expenses.
For now, the IRA direct charitable rollover provision does not apply beyond 2013.
Limits on Itemized Deductions
There has been much publicity about the reinstatement of a law that expired after 2009 that calls for a limit on itemized deductions. The so-called Pease Provision (named for a retired Congressman who authored the law) applies a limit on married couples filing a joint return who earn more than $300,000 and single tax filers earning more than $250,000.3
The Pease Provision applies a 3 percent cut in itemized deductions based on adjusted gross income (AGI) that exceeds the above-listed thresholds. In the case of a single person earning $400,000 in AGI in 2013, $150,000 will be used to determine the 3 percent reduction in itemized deductions. Three percent of $150,000 results in deductions being reduced by $4,500. For a married couple filing a joint return with earnings of $500,000, itemized deductions would be reduced by $6,000 (3 percent of the $200,000 above the threshold amount for married couples). However, a taxpayer can’t lose more than 80 percent of their deductions, and the reduction doesn’t apply to certain itemized deductions (i.e. medical expenses, casualty and theft losses).
What’s important to keep in mind is that the reduction in itemized deductions is calculated based on the amount of AGI, not on the value of deductions taken. Most taxpayers will not see their charitable deductions impacted by these limitations. There are rare situations when individuals with itemized deductions that represent a very small share of total income may have less incentive (from a tax perspective) to expand those deductions.
The benefit to higher income taxpayers
Taxpayers subject to the reduction in itemized deductions may have more reason to expand giving anyway. At the highest levels, tax rates have increased. For single filers with taxable incomes over $400,000 and married couples filing a joint return with taxable incomes above $450,000, the highest tax rate has risen to 39.6 percent from the previous top rate of 35 percent.
As a result, for every $1,000 in annual charitable contributions, federal income taxes may be reduced by $396 dollars (not accounting for the limit in itemized deductions mentioned above or state income taxes) for taxpayers in the top income tax bracket. In and of itself, each charitable gift for these taxpayers has a more favorable impact on tax liability than was the case in previous years.
Gifting appreciated assets
Those in higher brackets may also want to explore the benefits of gifting appreciated assets such as stocks that have grown in value in recent years.
Those meeting the $400,000 (individual) and $450,000 (married couples) taxable income threshold are also subject to a long-term capital gains tax of 20 percent on gains from the sale of appreciated assets, a bump up from the previous top rate of 15 percent. As an example, by gifting to a qualified charity shares of stock that have risen in value, the investor avoids the capital gains tax and may be able to deduct the fair market value of the gift from his or her income. Gifting appreciated assets (to the extent the gains would otherwise fall into the top tax bracket) is not a new strategy, but may be more appropriate given the new, higher tax rates that now apply to some investors.
No matter what your giving intentions are, it’s important to understand how tax changes can impact your financial plans. Consider working with a tax advisor or another financial professional if you plan to gift a significant amount to charity this year.
1 Keep in mind that under existing rules, charitable deductions may be limited based on the taxpayers AGI, type of property donated, type of charitable organization, use of the donated property, etc.
2 For example, using this provision can avoid the negative tax consequences that may result from having a higher AGI, such as causing social security benefits to be subject to taxation or phasing out other tax benefits.
3 This applies to taxpayers with AGI in excess of $250,000 (single), $275,000 (head-of-household), $300,000 (married, filing jointly) and $150,000 (married, filing separately).
Renée A. Hanson, CFP®, CEP®, CDFA™, CFS, is a private wealth advisor with Hanson, Ayala & Associates, a private wealth advisory practice of Ameriprise Financial Services, Inc. Her passion is in helping women achieve their dreams and financial goals, regardless of life’s many obstacles. Renée is licensed/registered to do business with U.S. residents only in the states of AZ, CA, CO, GA, IA, IL, MI, MN, MT, NH, NJ, NM, NY, OH, PA, SC, TX, VA, WA, WI. Please visit: www.reneehanson.com to learn more.
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