Charitable deduction survives “fiscal cliff” negotiations

ECFA Late on the first day of the new year, the Senate and House of Representatives joined together in passing the American Taxpayer Relief Act to avoid what had become known as the “fiscal cliff”—a series of broad tax increases and major spending cuts by the federal government scheduled to take effect at the end of 2012 unless Congress agreed otherwise.

Not without controversy, the bill was finally passed after great concern that if Congress failed to reach some agreement the American economy would suffer and potentially lead to another recession. After Congress voted to approve the measure, President Obama announced he would sign the bill into law.

For the most part, charitable giving incentives were not directly impacted by the legislation. President Obama and other political leaders from both parties had proposed greatly limiting the value of the charitable deduction through percentage caps, dollar caps, tax credit substitutes, and a variety of other alternatives, which could have cost charities billions of dollars in contributions. The bill also extended the IRA charitable rollover provision through December 31, 2013, allowing taxpayers who are age 70 ½ or older to give up to $100,000 from their IRAs and Roth IRAs to qualifying charities without having to pay income tax on the withdrawn amount.

ECFA has been working diligently along with a broad coalition of other leaders in the charitable community to preserve and strengthen our nation’s strong commitment to giving. ECFA encouraged lawmakers that during these challenging economic times important giving incentives like the charitable contribution deduction should not be eliminated or reduced for those who generously support the work of religious and other charitable organizations. Despite this good news in the bill, charitable giving incentives will undoubtedly be back on center stage in the next 60 days as Congress faces the debt ceiling debate.

Although none of the major proposed restrictions were placed on the charitable deduction, the “Pease” limitations — phasing out deductions for charitable giving, mortgage interest, and state and local taxes for high-bracket taxpayers — were reinstated and made permanent beginning 2013 to the disappointment of many in the charitable sector. Total itemized deductions for taxpayers will now be reduced by 3 percent of the amount by which adjusted gross income (AGI) exceeds a set threshold, up to a maximum of 80 percent of otherwise allowable itemized deductions.

The new thresholds instituted by the bill are $250,000 for individuals and $300,000 for joint filers. Pease limitations were first included in the tax code in 1990 but began a phase-out in 2001 until their full repeal in 2010. ECFA would encourage the President and lawmakers to reconsider the newly extended Pease limits on charitable deductions that ultimately discourage greater levels of giving to charitable organizations.

While payroll taxes rise, income taxes remain the same for most Americans

Almost obscured in the “fiscal cliff” discussion was the Social Security tax rate issue. Two years ago, there was a “temporary” cut so workers would pay 2 percent less taxes to fund Social Security. That tax cut expired on December 31, 2012 and was not part of the fiscal cliff negotiations. So, the payroll tax rate paid by workers increased from 4.2 percent to 6.2 percent effective January 1, 2013. As a result, workers will see an immediate decrease of hundreds or even thousands of dollars annually in take-home pay.

Income tax rates were probably the most widely debated issue concerning the legislation. While there was general consensus that the Bush-era tax cuts should be extended for the majority of Americans, President Obama and Congress were divided on whether rates should increase for wealthier Americans to help reduce the nation’s deficit. The deal reached in the fiscal cliff bill includes a compromise rate increase to 39.6 percent for individuals earning more than $400,000 per year and households above $450,000. Otherwise, the current income tax rates were preserved for most Americans and continue into future tax years.

Government spending was another critical and controversial part of the fiscal cliff discussion. Automatic spending cuts have been delayed until the end of February when Congress will need to readdress the issue.

ECFA will make further news and developments available as Congress takes up these and other possible tax law changes in the coming weeks.


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