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American Taxpayer Relief Act Preserves Charitable Deduction

1/4/2013
January 4, 2013

 
Late last night, Congress passed the American Taxpayer Relief Act of 2012 (H.R. 8) in a deal to avert the fiscal cliff. President Obama is expected to sign the bill enacting it into law in the coming days. Yesterday’s message prior to the House’s approval of the legislation provided details of some of the provisions. The following update provides a more thorough summary of pieces of the bill relevant to the philanthropic sector.
 
The preservation of the charitable deduction in the current legislative proposal is a testament to our collective efforts over the past few months to convey the importance of the charitable sector. However, Congress will address more comprehensive tax reform in 2013 and we must continue advocating about the important role philanthropy plays in our society. Both House Ways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) told their congressional colleagues that the passage of this legislation was just the first step toward more comprehensive tax reform. 
 
Your voice will be critical in 2013 as the 113th Congress considers comprehensive tax reform that could include alterations to the charitable deduction. The Council team will continue to keep you updated on emerging details and developments. We thank you for your continued support of our efforts on behalf of the philanthropic sector and the people you serve.
 
KEY PROVISIONS
  • 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.  Additional benefits for the long-term unemployed are extended through the end of 2013. Those benefits expired this past Friday. 
  • A two-month delay of the sequestration cuts. 
  • 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. 
  • The legislation did not prevent a temporary reduction in the Social Security payroll tax from expiring on Monday, December 31. Therefore, the workers’ share of the Social Security payroll tax that had been lowered from 6.2 percent to 4.2 percent for the past two years will return to 6.2 percent.

PEASE LIMITATION ON ITEMIZED DEDUCTIONS
 
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. 
 
An example of the Pease Limitation’s Impact:
In 2013, a married couple filing jointly has $500,000 in adjusted gross income (AGI) and claims $50,000 in itemized deductions. Under the newly passed American Taxpayer Relief Act, the threshold for the Pease Limitation is now $300,000. Thus, the couple’s itemized deductions would be reduced by 3 percent of the amount of their AGI that exceeds $300,000 (which is $200,000). The couple can only claim itemized deductions of $44,000. Without the Pease Limitation, the couple could claim itemized deductions of $50,000.  

AGI $500,000
Excess of AGI over $300,000 $200,000
 
3% reduction of the excess amount
x3%
Reduction of itemized deductions $6,000
 
 




 
The couple’s itemized deductions will be reduced by the lesser of $6,000 or 80 percent of the itemized deductions, which in this example is $6,000. Thus, the couple’s itemized deductions will be reduced from $50,000 to $44,000.
 
ADDITIONAL INFORMATION
 
We also wanted to make you aware of an announcement from the Treasury Department regarding type III supporting organizations. We will be providing further information about this announcement on the Council’s website in the coming week. 
 
Treasury has issued final and temporary regulations on type III supporting organizations (effective December 28). These regulations follow up on proposed regulations issued in 2009 implementing the Pension Protection Act of 2006. In summary, the final regulations define type III non-functionally integrated (NFI) supporting organizations and the new rules applicable to those organizations.
 
The regulations are final except for the portion related to the new payout requirement for type III NFI supporting organizations. The regulations relating to the payout were issued in temporary form with a request for comments because the payout rules were substantially changed from those included in the proposed regulations. The preamble to the regulations makes it clear that there are a number of issues regarding supporting organizations about which we can expect future proposed regulations.

This article has been provided by the Council on Foundations, a national nonprofit association of approximately 1,800 grantmaking foundations and corporations.
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Broward County Inspiring Philanthropy over 25 years